Saturday, November 19, 2011

Taxpayers Bailout $waption Gamble

In 2004, the board majority voted to enter into a derivative with Wachovia Bank called a swaption. Some citizens attending the meeting and one board member familiar with intricate financial arrangements were against the motion.
Financial derivatives are the instruments that banks concocted that ultimately brought this country to its economic knees. In 2010, the Pennsylvania Auditor General called for the ban of swaps.
The swaption involved the district paying a fixed rate to the bank while receiving a variable rate of return. In addition, the bank gave $819,000 as an inducement. The deal would end in February 2012.
The board gambled that in 2012, the variable interest rate would near the same as the fixed rate and that the value of the option would be one in which they could afford to buy out if they choose.
For those who follow market fluctuations, it is nearly impossible to predict what rates and options will be in six months much less in eight years.
The roll of the dice turned into a $6,000,000 bill for the taxpayer. $6,000,000 is the cost to buy out the option before it expires in February 2012. Otherwise, the bank will exercise the option, and the district will be forced into paying 5.03% interest on millions of debt until 2028.
The current board is left to scramble on how to pay this potential bill and not raise the current debt service of the district.
If they choose to participate in another swaption to mitigate the damage, they would be kicking the can down the road.
Bottom line, at some point, the community will be bailing out a gamble that should not have happened in the first place.
Add this to the $500,000 legal expense and the $2,400,000 judgment against the district for an unpaid bill to a contractor for the Middle School, and it calls for sitting board directors who voted for these debacles to step down.
We cannot afford the same people to continue to make the same mistakes.


Anonymous said...

Auditor general discourages school interest-rate swaps
Conventional loans safer, Wagner says
Thursday, November 19, 2009
By Tracie Mauriello and Eleanor Chute, Pittsburgh Post-Gazette

HARRISBURG -- Allegheny County school districts have entered nearly $1 billion worth of interest-rate swaps during the past 12 months. That's no way to handle public money, according to state Auditor General Jack Wagner.

Mr. Wagner yesterday urged school districts and other government agencies to end swap agreements in favor of conventional fixed-rate loans. He's also asking the Legislature to make it illegal for public agencies to use swaps.

His plea came after an audit found that the Bethlehem Area School District lost at least $10.2 million by using swaps in financing bond issues. Swaps are transactions that, basically, bet on how interest rates will move. Swaps can result in reduced interest rates or, in volatile markets, huge unforeseen costs.

"Quite simply, the use of swaps amounts to gambling with public money," Mr. Wagner said. "The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss. Swaps have no place in public financing and should be banned immediately."

Getting out of swap agreements is not necessarily cheap or easy.

It cost Butler Area School District nearly $5 million to exit a swap contract in 2008, a transaction that brought it an upfront payment of only $750,000. Superintendent Edward Fink said the loss is being financed over 20 years.

Some school districts came out ahead on swap agreements because the indices used to calculate interest rates worked in their favor.

Locally, Hampton School District is about $2.1 million ahead with its swap agreement, said Jeffrey Kline, director of administrative services.

When the district entered its swap in 2004, it received an up-front payment of $2.5 million, money it otherwise would have had to borrow for middle school construction. Since then, it has lost about $400,000, much of that last fall.

"It really was a good opportunity for us," said Mr. Kline. "We're certainly well ahead on the $2.5 million."

Mr. Wagner says that can change fast.

"The risk outweighs the benefit, and it's not a minor risk; it's a significant risk," he said.

North Hills School District is involved in three agreements, including one that extends to 2024. W. David Hall, director of finance and operations, estimates that at this point it would cost more to exit the agreements than to stay in them.

The North Hills agreements were based on the idea that taxable interest rates would be higher than nontaxable interest rates. The reverse is what has happened in what Mr. Hall termed "bizarre" credit markets.

So far, North Hills has received a $12 million up-front payment, made about $200,000 on one swap agreement and lost about $250,000 on another, he said.

Tennessee already has banned local governments from using swaps and New York is considering following suit, Mr. Wagner said.

Twenty-one percent of Pennsylvania school districts entered swaps between 2003 and this year, according Mr. Wagner's audit. More of those districts are in Allegheny than in any other county.
Tracie Mauriello can be reached at or 717-787-2141. Eleanor Chute can be reached at or 412-263-1955.
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Anonymous said...

House Finance Committee

Testimony on Interest Rate Swaps

please read this link:

Anonymous said...

Looks like the Oley School Board struck again!!!!!!!!!!!!!

Mr. Heckman, what are you doing? Your callous disregard for the taxpayers of this community will be the end of Oley. Where do you think the taxpayers are going to come up with the money to pay off this bill,right after we harvest the money that we have to pay for the legal mess with the Middle School.

Oley School Board synonymous with STUPID, ARROGANT, IGNORANT!

Anonymous said...

Complain all you want but when they come up for reelection they are overwhelmingly returned to the board without facing any opposition. We deserve the representation we get and all the baggage that comes with them

Anonymous said...

The good citizens of Oley will stay in denial until they lose their homes.
There is no Santa Claus.

Anonymous said...

I think local politicians take advantage of Oley's good nature.

Anonymous said...

How? Interesting, but please explain.

Anonymous said...

Perhaps the parents of the children involved in sports would understand if they had to pay $1,000 for an activity fee.

They want a track, they want lights, yet this only benefits a few children and it costs money.

Oley is Oley. Not Wilson, not Governor Mifflin or some huge school. If the parents want all for their children, then they should have to pay. God forbid when these kids grow up, if they grow up, and are still holding out their hands for everything. Obviously the parents don't get it, and neither will their children. No wonder this country is going down the toilet. Everyone wants something for nothing.

There is no such word as "FREE"!!!!

Anonymous said...

"I think local politicians take advantage of Oley's good nature."

"How? Interesting, but please explain."

The local politicians rely on the trust small communities have in the people they elect.
Because the elected are local, voters somehow think they can be trusted.
All governing bodies need oversight from the public.

Anonymous said...

That's why it's important to have new people run for these offices. In this past election something like 80 or 90% of the local positions (school board, township offices, etc.) were unopposed. Give the voters a choice and we might see some changes.

Anonymous said...

Term limits for school boards.

Anonymous said...

It doesn't seem to do any good voting any board members out of office. Exeter is a good example. A long time board member is voted out so at the next board meeting it's arranged that another member resigns and they replace him with the defeated board member. This is the contempt that school boards hold for the voting public.

taxpayer said...

The local papers missed this one. Blogs can be better sources of information.

Anonymous said...

There better not be a teacher laid off to pay for gambling like this.
There should be an investigation of why and how.

Anonymous said...

The teachers have no room to gripe. They eventually get their increase.

It's just very sad that Bob Heckman (king in his own mind) and Zackon (unprepared) and Ralph Richard (Voted NO, Mr. Clean and Green) along with the other ding dongs on the school board wagered a huge bet that THEY (the wisest of the wise), just to get their mitts on $815,000 that they did nothing with and let sit around, now cost the taxpayers $6,000,000 and their homes.

How very sad and pathetic that these WISE people, don't care that they put fellow human beings out with nothing left to live with. They are just politicians,and they are actually more dangerous than those than the typical State of Pennsylvania or Washington variety.


POWER, POWER, POWER!!!!!!!!!!!! Can never get enough of it!

George said...

Gov Rendell liked gambling. Why not tie the teachers salaries to the derivatives as well? Variable salary-- could be higher or lower.

Anonymous said...

Teachers think of themselves as "professionals" and therefore deserve higher pay than the peons.
The problem with this logic is that student performance does not match the lofty self appraisal of the teachers.

Anonymous said...

Teachers are professionals, and a good teacher is worth more than they are paid. There are plenty of good teachers in Oley.

Anonymous said...

Just as there are some lousy ones.

Anonymous said...

Teachers should be paid for performance not seniority.

Anonymous said...

My neighbor tells me, the board did not solve the problem, but made it worse. True???

oleytaxpayers said...

Your neighbor is fairly accurate.

The board majority voted to kick the can down the road. They approved a complicated financing plan that involves interest rate fluctuations.

Speculating on interest rates is a fool's game. It is the province of professional traders not school boards.

Anonymous said...

Way to go teachers. It's so nice to see that you are taking classes pertinent to teaching children.

1. What great teachers do

2. Google Earth and Maps

3. Assignment Homework: Where, when and why?


What is the answer to #1. How about we actually teach. That's a novel idea.

Google Earth and Maps - if they don't know we they are, we're really in trouble.

#3 - what homework?