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UPDATED: Questioning the Denver Post’s account of DPS pension issue

March 16, 2011

Note: The following piece comes from John MacPherson, a former interim executive director of the DPS Retirement System. The topic in question is a complex financial deal DPS made back in 2008 that has posed considerable risk to the pension system and the district’s budget. Though there has been much talk, especially last summer, of opposition to the deal being politically motivated, MacPherson opposed the deal from the outset, and e-mail evidence shows that Board Member Jeannie Kaplan expressed concern about it well before it could have been considered a political issue.

It has been difficult to get a straightforward accounting of just what the deal will mean for the district, as well as how much money has either been saved or lost as a result. Given looming budget cuts and the cost of restructuring the deal, there is a lot of worry over what it will mean for students and schools.

For more background and information on the issue, see:

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DPS Restructures 2008 PCOPs Debt

In April 2008, then DPS Superintendent Michael Bennet, convinced the Board of Education to issue $750 million in Pension Certificates of Participation (PCOPs) to bring the DPS Retirement System to a 100% funded status. The move was controversial then and remains equally so today. Later this week the DPS Board will vote on a restructuring plan for the 2008 PCOPs debt.

A restructuring of this debt is necessary because the European bank that has provided liquidity on the deal no longer will do so after April 24 (Liquidity means the bank will buy the PCOPs when no one else will.). Adding to the bleak DPS situation is the fact that the number of banks that have provided this type of credit support in the past has diminished since the financial crisis began in 2008, severely limiting the options for DPS to restructure the debt. The Denver Business Journal reported a couple of weeks ago that DPS has a couple of options but that the complicated deal looks like it will cost the district millions to unwind and restructure.

Last week, the Denver Post ran a related story which contained so many incorrect statements that it seems to have created more confusion than clarity. You can read the Post article here.

The Post story opens by stating, “Denver Public Schools board members are trying to balance risk against cost as they choose a plan to restructure the district’s pension fund next week.” This is absolutely wrong! DPS cannot restructure the district’s pension fund. DPS employees and retirees are now part of Colorado PERA in the DPS division. With the merger of the former DPS Retirement System into PERA effective 1-1-2010, DPS no longer has control of the structure of DPS pensions; that responsibility belongs to the Colorado Legislature. What the DPS board is looking at is the risk versus the benefit of restructuring the $750 million debt it took on using a risky financing method relying on short-term interest borrowing matched against long-term interest costs. This practice involved a very complicated methodology that was characteristic of the “shadow banking” prevalent in the run-up to the 2008 financial collapse that took the U.S. and world economies into the most serious recession since the Great Depression. The DPS Board now has to consider whether to continue playing with this risk versus a substantial added cost of converting the debt to a straightforward fixed rate long-term bond at the current low interest rates. Both options are expensive.

Another line in the Post story reads, “DPS’s pension plan is funded, in part, by weekly sales of certificates of participation, or bonds.” Not at all! The DPS division of Colorado PERA is funded through active member contributions, employer contributions and, most importantly, investment earnings. The weekly sale (or failure thereof) of the PCOPs determines only the rate of interest DPS has to pay on this debt. DPS is allowed to take an offset against its employer contribution to PERA equal to the amount of the payments on the PCOPs debt. However, even this offset comes with limitations ensuring that DPS makes at least a minimum payment to fund the DPS division.

Going forward, DPS will need to rely on another short-term, complicated financing scheme. The existing lending banks, who already have their hands deep in DPS’ pockets, will issue 3-year letters of credit allowing DPS to continue playing in the swaps market. What will the financial picture be in 3 years? We can only hope it has improved and DPS can again restructure its debt and hopefully fulfill the promises made by Michael Bennet in 2008.

What are the implications of the PCOPs debt restructuring for the DPS pension plan? None! DPS is obligated to continue making the employer contributions stipulated by law in the merger legislation. I have every confidence that the PERA Board and administration will ensure that they do so.

I predict DPS will continue to experience problems with their “pension debt” for many years to come. As time goes on, the district will have to put more of its buildings up for collateral to entice lenders. Who knows, in time East High School may give way to the J.P. Morgan Early College of Finance.

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