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.
“I’m the steward of public money, and I’m not totally comfortable with swaps because I think they are pretty risky,” said board member Jeannie Kaplan. “This is a lot of money.”
On Monday, the district’s financial advisers offered options to the finance and audit committee in advance of a March 17 vote at the board’s regular meeting.
DPS’s pension plan is funded, in part, by weekly sales of certificates of participation, or bonds. An agreement with Brussels-based Dexia protected the district from financial risk by promising to purchase the bonds if they did not sell in the open market. The deal, known as a liquidity agreement, ends in April. Dexia will not renew the relationship.
The recession has made banks reluctant to become standby purchasers, so there is no replacement for Dexia, which insured the entire $750 million pension plan in a deal made in 2008.
Without a liquidity provider, DPS would shoulder the risk if the market crashes again.
One of the options DPS is weighing would allow a group of three banks to provide the insurance through letters of credit for a portion of the $750 million certificates. At least $250 million of the certificates will have to be converted to higher-interest, fixed-rate bonds.
There will be a termination fee to convert the bonds to a fixed rate, which will be determined by the interest rates at the time of the deal. Using the most recent rates, from March 4, the cost to convert at least $250 million is estimated at nearly $24 million.
Converting the entire $750 million to fixed-rate certificates would mean the district would have to cut another $9.5 million from school budgets next year.
Financial advisers told the board the key is finding a comfort zone between risks and lower costs.
“There may not be a magic bullet, but identifying where all those tensions lie is key,” said board-hired adviser Tim Schaefer.
Board members also will consider introducing a financial-management policy that would allow them to convert more of the certificates to a fixed rate, when the termination costs are lower.
“This does not lock us into this deal for the next three years,” said board member Bruce Hoyt. “It’s probably a less favorable time to fix now.”
The current deal was made in 2008, when DPS needed to fund its pension 100 percent as part of an agreement to merge with PERA, the state’s pension fund.
To do so, the district needed to fill a $400 million shortfall and pay off $300 million in debt to the bank to make up for the interest that the added $400 million would have brought the banks. DPS issued $750 million in 30-year, variable-rate pension certificates of participation in order to do both.
This year, DPS will use pension savings to backfill state budget cuts so that most schools will receive a budget similar to last year’s.
