For those of you that have been paying attention the the issues around the DPS pensions, the latest update is that the state legislature’s audit committee just reported that the Public Employees Retirement Association (PERA)’s school division is sound. This is great.
There was particular attention paid to the health of the Denver Public Schools’ portion of the PERA fund, and it’s also in good health. In fact, it’s in better health than the other school pension funds within the PERA system. This has never been at issue.
Let’s be sure we understand something, though. The pension fund will ALWAYS be in good shape. DPS will ALWAYS make our required contributions. Why? Because we’re required by law to do so.
The issue is really about what happens to money bound for classrooms that has to be redirected to pay our pension obligations. Under normal circumstances, we would have to pay something like 24% of salaries to meet our state-mandated pension contributions. Right now we’re not, because as a part of the legislation that merged the DPS retirement system with PERA, we were allowed to back off some costs. Those costs are associated with the interest-rate swaps and associated indebtedness. However, the tricky part of the merger is that by 2015, we will have to make up all that “backed off” cost plus whatever 24% looks like. Some estimates show that figure to be pretty steep.
Retirees don’t have to worry. Again, we are required by state law to keep the pension fund healthy.
However, this has a lot of bearing on what we can afford for classrooms, and it’s for this reason that the interest-rate swaps are a problem. As a quick recap, the swaps were entered into as a way to have a “pretend” fixed rate when we refinanced pension bonds in April 2008. The board at that time opted not to go for a true fixed rate that may have been a bit higher. The original start-up costs for that swap deal were around $10 million; in other words, we handed over that much money to the banks on the other end of the deal.
Not only did we leave $10 million on the table when we inked the deal, but we also lost money in the market. Our calculations show, for example, that in February 2010 alone we lost $2.7 million because of the markets.
How do we get out of this deal? Well, one option would be to pay a fee, called an “unwind fee.” We would need to cough up $81 million for that privilege.
To make matters worse, one of the “partners” on the deal is getting out of the interest-rate swap business. We need to have a cash backup for this deal to ensure the banks on the other side of the deal get their money if we default. That cash backup is provided by a “liquidity provider,” and in this case, that provider is a Belgian firm called Dexia. They have informed us that they will not renew their contract with us to provide that backup. This is compounded by the fact that the available pool of liquidity providers is shrinking dramatically: there aren’t that many other options to choose from.
Also, there is that possibility that Amendment 61 will be passed. That will make it impossible for us to borrow money to pay costs, and one of the central moving parts of this deal is that we temporarily borrow money to pay the “partners” on the other side of the deal. This means that we will have to have our own cash “backup” and serve as our own liquidity provider.
This scenario, with Dexia leaving the market on one side and Amendment 61 on the other, is just like being between a vise. We have to get out of this deal.
This is why Jeannie Kaplan and I are pushing very hard to hire an outside, impartial financial consultant to the board to advise us on this situation. I’ll also be pushing Tom Boasberg to bring the parties back to the bargaining table to renegotiate at least the unwind fee on this deal so we can get out with as little bleeding as possible.
So yes, pensions are healthy, but all this has implications on how much we have to spend in the classroom.