State To Audit Bethlehem Area School District
From Sunshine Review
July 6, 2009 The Pennsylvania Auditor General's office will investigate Bethlehem Area School District in Pennsylvania for their use of bond swaps.[1]
[edit] Swap
The school district's swap deals cost them and taxpayers over $57-million since they began using them in 2003, warranting Auditor General Jack Wagner's impending investigation. A swap is an agreement to pay off debt that is based on a variable short-term interest rate, with the hope that lending rates will stay below long-term interest rates.
The BASD conducted 17 swap transactions through JP Morgan and Morgan Stanley, the most of any school district in Pennsylvania. They were supposed to save taxpayers money, according to Superintendent Joseph Lewis, but the raised rates incurred a penalty.[2]
Wagner's office will look at the economic impact the swaps had on BASD after state Senator Lisa Boscola's June call for a thorough review.[1]
[edit] Unforeseen bust and a potentially sparse report
The world economic "crash" evaporated the interest savings that BASD expected, causing interest payments to reach about $30 million. Records show the BASD is scheduled to pay millions more in interest, annual management fees and termination payments to the banks.[2]
Pennsylvania's Morning Call reporters discovered the deals were far more costly than administrators had previously publicized and the board realized. The swap deals have cost $9.9 million in net payments to JP Morgan and Morgan Stanley investment banks and $25.4 million in fees and termination payments.[2]
The district did not seek competitive bids for financial services, employing one person to perform four functions with the deals, going against "best practices" of public finance that the state Department of Community and Economic Development and the Government Finance Officers Association in Washington, D.C. issued. This jack of all trades, the district's former financial consultant Les Bear, was put in charge of $5.6 million and four overlapping roles, including financial adviser and bond underwriter.
The Morning Call reporters learned that JP Morgan Chase Bank had a business relationship with Bear's recommended swap adviser, Matt Kirk of Access Financial Management in Lancaster County. This relationship overlapped the time the bank was backing at least two school district swaps.
Lewis' administration released a report on June 22 that claimed the swaps saved taxpayers $6.3 million. But the report did not account for millions in costs and made questionable comparisons to other districts' fixed-rate borrowing, according to Morning Call.[2]
The report would have shown a taxpayer loss of $16.6 million if it had included bond and swap fees and thw termination payment to JP Morgan.
Lewis released that the district welcomes the investigation, hoping it will clear the air.[2]
[edit] External links
[edit] References
| |||||||
