Denver’s high interest payments are its own fault
The Denver Business Journal is reporting an astonishing story about the Denver Public Schools paying 6.17 percent interest on $396 million of floating rate bonds that were part of a larger bond offering in 2011. The bonds were issued to fund a required contribution to the school system’s pension fund:
Denver Public Schools finance officials say they aren’t ready to refinance the $396 million variable-rate portion of a controversial $792 million pension bond deal, despite historically low interest rates on municipal bonds.
The variable-rate pension certificates of participation (PCOPs) have performed “better than expected” since they were refinanced in April 2011, said David Hart, CFO of the district.
DPS has paid 6.17 percent interest on the variable-rate PCOPs since April 2011, lower than its anticipated interest cost of 6.42 percent, he said.
The bonds, due in 2037, are rated Aa3 by Moody’s and were issued to refinance an earlier variable-rate bond deal from 2008. The earlier bond offering was backstopped by Dexia, the Belgian-French firm that encountered substantial credit problems. The question for Denver taxpayers: Why is the school district paying such a high interest rate? And why doesn’t it refinance? Current interest rates for comparable bonds at the same rating level and maturity would be 3.99 percent, according to Thomson Reuters Municipal Market Data. The cost difference between 6.17 percent and 3.99 percent for the $396 million in debt would $8.6 million per year, or about $215 million over the term of the bonds. That extra $8 million per year could hire a lot of teachers.
But Denver can’t refinance. In a repeat of an earlier debacle, the city cannot pay off its high-priced bonds without triggering a termination event for the $396 million in interest-rate swaps that were issued with the bonds. As the Official Statement says: a “Termination Event [occurs when]… (iii) all of the 2011A Certificates are discharged, defeased, refunded or are otherwise no longer outstanding.” In plain English: You refund those bonds, and we want an upfront cash payment for these interest-rate swaps. The banks on the other side of the swaps are Bank of America, Royal Bank and Wells Fargo, and they have Denver schools over a barrel.
Managing interest-rate swaps is a complex process and generally way beyond the capabilities of school district officials. The Denver Board of Education adopted a policy governing the use of derivatives in October 2011, but that was rather late in the game, given that the board had already entered into two series of interest-rate-swap derivatives. Denver is not alone in being locked into high-cost borrowing that cannot be refinanced. As fiscal resources contract, more bad deals will surface. Taxpayers need to know why these deals were done and to whose advantage. It’s not likely to be the public’s advantage.