A lengthy and often contentious struggle to secure a refinancing of the Denver Public Schools pension debt passed a rare benchmark Thursday night as school board members voted unanimously to refinance the $750 million pension obligation, equally, between fixed-rate and variable-rate markets.
It was a rare moment of accord for a board with a reputation for fractious disagreement on substantive issues such as school reform.
“Tonight, we have turned our back on those who would divide this board,” said board member Jeannie Kaplan, one of the harshest critics of the original 2008 refinancing that, coinciding with the disastrous turn in the financial markets and the pending exit of a key financial partner, forced the board to address its pension debt anew Thursday.
“It is important for all of us to realize that we can work together,” said Kaplan.
Others echoed the sentiment.
“This is a very good day, when we’re able to find some middle ground in our risk tolerance,” said board member Arturo Jimenez.
An element of risk
When the cost of termination fees and other expenses are factored into the new transaction, the total debt is now about $844 million. With its 7-0 vote, the board has authorized $422 million to be invested in fixed-rate markets, with $422 million left in variable-rate investments. The annual costs on the transaction are estimated at $72.7 million.
The decision still allows the district to move more money into fixed-rate markets at a subsequent point.
A key consideration for board members was how much risk they were willing to tolerate with public money. Fixed-rate investments are more secure but also more expensive, while variable-rate investments cost less but carry more risk – and the possibility of greater reward.
DPS staff had recommended investing one-third of the total $750 million in fixed-rate markets while putting two-thirds in variable-rate markets. Some board members wanted all of it in fixed-rate investments. The 50-50 split was a compromise that board members discussed at Monday’s work session.
They were working on deadline because a financial partner to the original 2008 transaction, the Belgian-French financial institution Dexia, is exiting the partnership on April 14. That meant the board had to approve a new refinancing plan no later than Tuesday, due to the crush of paperwork involved in re-working the complex deal.
Thursday, numerous board members heaped praise on Mary Seawell, the board treasurer, who chaired many discussions on the issue by the board’s finance and audit committee, helping to steer her colleagues to a moment of unity. They praised Kaplan for her role as well.
Seawell expressed no illusions that their days and nights of scrapping are over.
“I know there are many, many rough discussions and arguments ahead, but I’m here for the long haul,” Seawell said.
The plan adopted Thursday night commits $422 million at a rate of about 7.2 percent. But, with termination payments and other fees are factored in, that equates to an “all-in” rate of 8.4 percent, for the 27-year duration of the agreement.
Bringing the fixed-rate portion of the refinance in below 8.5 percent is seen as critical to district officials, because 8.5 percent is the rate at which DPS was being charged on its unfunded pension liabilities.
Different options, different price tags
District staff on Monday recommended fixing just one-third, or $250 million of the $750 million debt, and leaving $500 million in variable-rate markets. The board also would have the option of coming back and moving some, or all, of the balance into fixed markets at a later date when rates might be more to the district’s advantage.
“Tomorrow, we may be at odds again, and that’s okay.”
— Board President Nate EasleyThe staff-recommended option, and the plan approved Thursday, don’t carry the same price tag.
District financial advisers had calculated that fixing the rate now on just a third of the $750 million would cost DPS an average of about $67.4 million a year through 2038. The cost on fixing half of the $750 million, and leaving half in variable markets, was estimated at $69.8 million per year, or a difference of $2.4 million. (The $72.7 million figure is based on the new $844 million total.)
That disparity between the two options was one of the reasons that Superintendent Tom Boasberg had urged board members to follow the staff recommendation.
Nevertheless, Boasberg stuck firmly to his contention that the 2008 deal has worked to the district’s advantage, and that Thursday night’s refinancing still leaves it in a good financial position. The original transaction was aimed at shoring up the DPS Retirement System, freeing dollars for the classroom and facilitating a merger with the Public Employees Retirement Association or PERA, the state pension plan.
“Next year, DPS will not have six furlough days, it will not have four, it will have zero furlough days,” said Boasberg. “Next year, in other districts, we’ll see reductions of hundreds of teachers. In DPS, we’ll see zero, and I think it’s a remarkable position to be in.”
Additionally, Boasberg said, “Our pension fund is in a far better position than any other division of PERA.”
Board President Nate Easley, who is facing the threat of a recall, was one more member enjoying at least one night of political peace.
“This is one of the most important votes I’ll ever have the opportunity or pleasure to make while on this board,” Easley said. “I’d like to thank my colleagues for their work on this.
“Tomorrow, we may be at odds again, and that’s okay.”