Accountability is a great topic for Mr. Hutchinson since the total money stolen from the public by Mr. Hutchinson and his old cronies is today nearing $11 million and rising.  Below is a transcript of a statement read by a citizen at Monday's SCASD board meeting.  They didn't listen to the public concerns about the high school plan and it cost us $5 million.  We at least have a set of crappy plans for a school that will never be built for that money.  That is nothing compared to this.

September 14, 2009 by Don Gordon.

I want to make a statement about the Qualified Interest Rate Management Agreement (QIRMA) initiated in  2006.  You call it a fixed interest rate swap. In my opinion. It’s a $58 million contract involving bond rate hedging and derivatives, it’s gambling with taxpayer money.  

The April 2009 SCASD Financial Update shows a cost of $8.4 million to terminate that contract. Unofficially the cost may be lower today $6M, higher tomorrow $12M.  Who knows? Nobody.

Here is my first concern.  We have a $58 million debt obligation but no debt. Why?  The previous school board approved a $58 million bond obligation two years prior to the Act 34 approval of the high school project. At that time the project was estimated to cost $68 million, increased to $112 million, overbid by another $17 million, then cancelled.

A debt obligation is normally cancelled when a project is cancelled.  So why wasn’t the debt cancelled at that time when the termination fee would have been very low?  That’s a rhetorical question. We all [board members] know the answer.

Because, also in 2006, Pennsylvania passed the Taxpayers Relief Act, called Act 1,  which imposed a requirement for public referendum on large budget increases.   Because the $58 million was obligated before Act 1 it could be spent without referendum.  The board tried to carry the $58 million forward to evade referendum. I think that action is contempt of taxpayers.

About 111 School districts got involved with over 400 swaps and about a third of them are terminated. I can’t find another QIRMA involving carry forward financing. Swaps are not intended for carry forward financing. [See: Pennsylvania Department of Community & Economic Development, Qualified Interest Rate Management Agreements – DEG can provide a copy]

Here is my second concern. Where did the idea originate that a school district should get involved with hedges, derivatives, and swaps. Competitive bids were not sought. Second opinion was not sought.  The rates were derived (hence a derivative) from a ten currency arbitrage index called the London Inter-Bank Offer Rate (LIBOR) rather than a traditional bond index. Arbitrage is the highest kind of investment risk. It’s a  bet on future currency markets. It was international financing involving a London arbitrage index and the largest bank in Canada versus a school district. Risk exceeded knowledge.   The district’s risk mitigation plan required by the state would receive a D – at any business school.      

Who planted this seed?   I can trace the introduction of this idea to January 2006  and the former business manager and Lou Verdelli of Public Financial Management,  your financial consultant.  By the way after Verdelli sold you the hedge he went to work for the Royal Bank of Canada.  Remember Richard Wood of Rhoads and Sinon your legal consultants, he’s involved too and all of them pass through the Pennsylvania Association of School Business Officials acting as a focal point. Gov Rendell refers to swaps as fleecing school districts.

Pennsylvania law requires these consultants to be totally independent.  Yet the board  agreed to have the Bank of Canada pay them and the district solicitor’s firm, directly or indirectly $233,000 (total) (1/4 $ million) in fees. To me that’s a conflict of interest.

Where was the due diligence? Did your legal advisors report that the Bank of Canada paid a $1.5 million SEC fine for deception and has two federal court cases pending for similar allegations?  

Here is my third concern: In 2006 the school board closed Citizen Advisory Committee for Finance  meetings to the public. The board president, Susan Werner, opined at the time that CAC  meetings were too complex for average citizens to understand.  Apparently too complex for the board too. Independent notes of working sessions show some CAC members questioned the use of public funds for such high risk nitwittery.  Unfortunately, consensus triumphed critical thinking, the CAC recommended the hedge.  The district’s own charts show the index was almost never favorable to the school district.  

The index went the wrong way. The dollar lost 40 percent. The arbitrage index tanked 62.5 percent. The district is upside down. We have to pay big to get out.

Even the district’s financial advisors suggested terminating the swap in July  2007, at a loss of $300,000. Were you aware that the termination fee increased 290 percent in only 30 days during that period [June 29 to July 31, 2007]?   Didn’t that set off loud alarm bells?    By October 2007, the loss was $2 million.  But the same board refused, insisting on a zero loss. By April 2009, the termination fee increased to $8.4 million.  This particular arbitrage index is about devaluation of the dollar caused by growing national debt. Don’t expect a zero loss. I do understand that the largest effect on the swap termination fee is long term municipal bond rates, but don’t dismiss the arbitrage index.

Hedge financing for local government was prohibited, rightfully so in Pennsylvania until 2003 because of high risk.

The current board is left with a giant lose-lose mess.   Any choice will cost the district’s taxpayers and not one dollar of it will go to education.

All of this because of contempt for open records and meetings and public referendum. The lesson will be very expensive. Hopefully your priority will be to terminate the swap at the lowest cost and not to extend the swap in order to evade public referendum.

Given this track record, I strongly recommend that you hire a truly independent hedge expert, for a second opinion,  to guide you through your hard choices ahead.  Use the district’s public relations department to do something useful and explain all this in plain English using classical mathematics to the public who will pay this bill.

Ouch, this is really going to hurt!  And I thought Hutchinson said he was good at math! 

But on a truly serious note, our schoold district could really use that $8 MM (or is it $12 MM by now?).  This does call for an investigation. 

What's the executive summary?

Somebody (who?) invested school money?/bought debt insurance? (what?), and when the market crashed somebody (who?) didn't do due diligence and money was lost? (how much exactly?)

I had no idea hutch was a financial guy.

So somebody was messing with hedge funds and risky investments - who was that specifically, does anybody know?

Who's Don Gordon again? How did he gather these names numbers and charges? And who else is investigating this?

I'm all for investigations - just as a general principle. Constant transparent investigations is part of my model for government. Assume they are going to be corrupted by power, and help them by making multiple systems for investigation a basic part of government.

I don't usually agree with your politics but do believe you have a genunine interest in exposing some of the crap inherent in the political process.

Left of Centre http://thorsteinveblen.blogspot.com

Left of Centre http://thorsteinveblen.blogspot.com

When the new board took office in January of 2008, the long-term swap rate stood at about 3.25%. In April of 2009, it stood at 2.25%. This info is in the pdf. Had the new board acted immediately to terminate the swap, the loss would have been less than the $8.4 million reported here. Why didn't the new board act quickly?

Veblen,  you usually pride yourself on doing your homework and your ability to hotlink references, perhaps something Dr. Spanier said over the weekend is distracting you?   Do your research.  This has nothing to do with State High Vision other than the fact that they exposed the old board for poor decision making and fiscal irresponsibility with our tax dollars.  The new board inherited this swap and by January 2008 when they would have first been able to do anything about it, the district was already in the hole for millions.  The question is why the old board didn't terminate the swap when they dumped the stupid high school plan?  When it first came up in the Summer of 2007, the loss would have been at around $300,000 (according to the district's records).  Instead, they held on to it with the notion that they had the money for "free" (without having to put it to a public referendum).  Isn't it interesting that the district's business manager left soon after?

Your very own Tax and Spend Governor Rendell said that these swaps were trouble for school districts.  Mr. Gordon is asking the right questions.

Left of Centre http://thorsteinveblen.blogspot.com

Even the district’s financial advisors suggested terminating the swap in July 2007, at a loss of $300,000. Were you aware that the termination fee increased 290 percent in only 30 days during that period [June 29 to July 31, 2007]? Didn’t that set off loud alarm bells? By October 2007, the loss was $2 million. But the same board refused, insisting on a zero loss. By April 2009, the termination fee increased to $8.4 million.

And will Voices investigate? 

I'm no financial wiz, so can somebody explain to me exactly what it is that was bought, and who bought them?

Bonds? "Swaps" (like credit default swaps?), insurance, guarantees? I must have a mental block, I can't model in my head just what we are talking about.

And who signed the purchase order? Who's the finance guy here? Who made what decision?

I'm still trying to digest this story and get a summary of the suggested offense and offenders.

Isn't every institution in the country moaning and bitching over money lost in the crash? What makes this different from their complaints?

Left of Centre http://thorsteinveblen.blogspot.com

Oh my god, that may be the most horrifyingly obtuse collection of intentionally impenetrable technobabble that I have ever read.

One uniting theme seems to be "an agreement to make a series of payments". So, what are the amounts of the payments, and how much has been paid, and how much will have to be paid to keep the agreements?

There's gotta be like a finance company that's managing this for the school district - who is that again? Who was the advisor that got the interest rate swap agreements going, and was/is presumably in charge of managing their risk?

Did the school board have like a big vote thing, in the records, in which they discussed how cool interest rate swaps were, and then voted to get them?

And who can explain what went wrong - cuz they musta thought it was a great idea at some point, right?

How could we draw a chart of this affair? That might be amusing.

"cuz they musta thought it was a great idea at some point, right?"  (WRONG)

That is the problem Bill - number one, some of them were not looking out for this community to begin with - but rather for their own agenda and the rest of the sheep in that flock didn't know any more than you do about this.  They followed along blindly because they were too lazy or stupid to learn about this on their own.  Some of those folks would have agreed to buying the moon for as little as some praise and a party invitation.

Our illustrious local newspaper will never look into this matter.  The editor is far too close with the old board members and the rest of the Borough elite.  Plus, the issue is a complex one and their current staff probably isn’t up to the task.  It’s much easier to focus on PSU football and award winning minestrone recipes. 

I’m hoping the current school board will self-report and establish a truly independent board of inquiry. 

I'm usually pretty good at extracting information and understanding a situation.

But with the information at hand, I can't tell if I'm looking at negligence, or just another result of the bush economic collapse. I expect the CDT feels much like I do.

Which is why I keep thinking the thing to do is identify the people responsible for the "investing" or financial bet-placing or whatever this is, and see if they have an explanation that isn't gobbledegook, and that makes sense.

Obviously you enemies of the old board have a vested interest in pushing scandal, so what you say has to be judged with that bias in mind.

This whole thing could be basic republican black-ops, right out of the republican strategy 101 manual. We would have to be fools not to be aware of that.

But, my gut instant is to distrust ANYONE that plays derivative games with public money. That's my bias - this stinks of wall street and banker thievery.

So, for me, the big question remains - WHO was responsible for the financial management of these derivatives? That's the only person who can answer the question, was this negligence, or a sad result of the collapse? That's the person who should be interviewed.

I hope the new board does set up an investigation. I love investigations!

Well, Desi, that's a lot of political hyperbole, but I'll extract the gist of your storyline, which is that there were some bad guys who were out to schnooker the taxpayers, and there were some sheep.

So, who are the bad guys, and who are the sheep?

Now, in the middle of the bush era, everybody seemed to think there was tons of free money, and all the rich folks seemed to be chuckling with glee at the idea that you could borrow money for nothing, and BUILD BUILD BUILD, and then borrow more money because what you had built was magically worth even more than it was worth when you started to build it. I know tons of people who borrowed money, and they seemed to think they were REALLY SMART to do it. And you know, a lot of them made out like bandits with it, because they did it early.

I can't know what was in the old boards mind, but I'm not sure I'm willing to buy the idea that there were these "bad guys who wanted to steal taxpayer money", when the whole mindset of that era was "FREE MONEY - borrow it almost for nothing and use it to improve your lives". (Not that simple wide-eyed naivete and a fat dash of greed doesn't mean that era's board shouldn't be replaced.)

However, I'm willing to listen to a story of bad guys and sheep.

But it's gotta be a real story. Hyperbole by itself triggers all my agenda warnings.

Bill,

For once, I actually agree with Veblen, a full investigation is warranted and no one should be spared embarrassment.

I doubt that such an exercise would turn up “theft” of taxpayer money, but rather a healthy dose of gross mismanagement.  The old board suffered from severe “Delusions of Success” whereby they would set themselves up for failure by exaggerating benefits and routinely underestimating risks and cost.  This certainly was the case in their high school project where they thought they were qualified to deal directly with contract architects and construction companies with disastrous results.

I imagine the same is true here only now it’s the financial consultants selling them on the need for hedges, derivatives, swaps and currency arbitrage.  This is yet another sad example of the old board not recognizing their tendency to exaggerate their own talent and to believe they are above average in their endowment of positive traits and abilities. 

So it appears that they engaged in some questionable financial practices which has produced some very large financial liabilities for our school district.  The questions I would like to see answered are:

1.    Why didn’t they terminate the swap immediately?

2.    Why didn’t the return the bonds when the high school project was cancelled?

We need to learn from this debacle so it is not repeated in future.   We also need to ensure greater transparency in all financial dealings.

Hutch and his colleagues are out of their depth in a puddle of water.  Somewhere he's depriving a perfectly good village of its idiot.