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.