( – promoted by Colorado Pols)
I’ll readily stipulate that this is a big story.
That said, I don’t know that it’s the nuclear bomb that everyone thinks it is. After reading the story, and reading some earlier stories written before DPS engaged in this latest round of funding, I’m more convinced than ever before that this is a re-litigation of a story that we’ve already seen on this site.
What’s more, as a journalism student and communications professional, it seems to me that if your main source – Jeanne Kaplan – happens to be a supporter and a max contributor to the man running against the subject of your story, you may want to disclose that. I mean, that’s just a small conflict of interest. It took me five seconds on OpenSecrets to find out Kaplan’s donated $4,800 to Romanoff. Seems Gretchen could’ve included, somewhere in the story:
“Kaplan, who in addition to serving on the board is a major supporter of Mr Bennet’s opponent, Andrew Romanoff, feels that greater transparency was necessary.”
That, however, would’ve ruined the portrayal of Kaplan as a selfless steward of the school coffers. But more on her anon.
Without straining everyone’s patience beyond where it lies, here are the points that seemed salient to me.
The funding instrument was strange or unique, even exotic.
I find this hard to swallow. DPS first did a Pension Certificates of Participation (PCOPs) issuance in 1997. What’s more, eight years later, DPS did a variable rate issuance with a swap – precisely the same transaction that everyone is now claiming was a massive conspiracy.
It’s an odd conspiracy that sees Bennet and Boasberg somehow con the school board even before they arrive!
Why didn’t DPS go with a “plain-vanilla” bond?
Because there’s no such option. Regardless of how you handled the pension debt – whether on a fixed-rate or variable rate – it would’ve still take the form of a pension certificate of participation (PCOP). In 1997, it was a fixed rate PCOP. In 2005 and again three years later, it was a variable-rate PCOP. And in those two occasions, the interest rate hedge that was used in the PCOPs was a derivative – something that’s very common and has now been around for nearly 35 years in the financial sector.
You know where I first learned about derivatives? Believe it or not, Michael Lewis’ Liar’s Poker, first published 20 years ago. It’s a pretty easy read. Jeanne Kaplan should think about reading it sometime.
Wait, Kaplan? She seems like a pretty stand-up person. All she wants to know is where the money’s going, and where it’s been.
Which are great questions to ask! Except that, incredibly, she’s never asked them until after she voted to approve the PCOPs – twice! What’s more, here’s her explanation for why she’s so flummoxed (courtesy Susan Greene, at Denver’s paper of record):
“The resolution was 13 pages, and it has I don’t know how many ‘whereases’ all through it. It’s very complicated stuff,” says Kaplan, revealing her ineptitude both with finance and basic reading.”
“I’m not sure any of us really knew what we were voting on,” Kaplan says. “It’s one of those things. You say the word ‘derivative swaps.’ And come on now, how many people really understand that?
“I admit that I probably didn’t have as much information as I should have,” she says. “That could well be my responsibility.”
facepalm Really? You don’t say? I mean, you couldn’t abstain from voting until you’d done more research? And not only did you vote once to approve the deal, you voted twice without knowing what the hell you were voting for? And she’s the person who won the election?
Wait…she was re-elected? Amazing. Ladies and gentlemen, Jeanne Kaplan: Denver’s own version of Sarah Palin. Just as ignorant, just as dangerous.
And as for how many people understand “derivative swaps”, here’s Wikipedia, with the first result in the magic Google box:
A derivative is a financial instrument – or more simply, an agreement between two people or two parties – that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to – such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.
I mean, it’s Wikipedia, I know, but still. You mean to tell me that Kaplan, as an elected official with a fiduciary responsibility couldn’t take seven seconds to type in “derivative swaps”? And this is someone in charge of money?
Man, I’m hoping someone’s checking Jeanne Kaplan’s email to make sure she’s not replying to various Nigerian government officials. Can someone check on that, please?
If anything, the combination of her rank incompetence along with her clear conflict of interest is the story here. She’s clearly shown that she’s unfit to be anywhere near a tip jar, let alone a school budget. Between failing to do due diligence, voting twice to approve a deal she didn’t bother taking the time to understand, and then engaging in a political witch-hunt to somehow evade responsibility, Jeanne Kaplan is sure covering herself in glory here.
Wait, there’s more – it turns out that she’s contributed the maximum amount to one of the candidates in the primary: $4,800 to Andrew Romanoff. So, it stands to reason that she might have just the slightest, tiniest, interest in making Bennet look as bad as possible. Just a hunch, there.
Look, this isn’t to say that Bennet and Boasberg don’t deserve scrutiny for their actions. They do – and G-d only knows, there’s been enough of it over the last two years.
The fact of the matter is, though, the whole point of having a school board is for them to exercise oversight over the district administration. And it’s clear, just from a top level glance, that Jeanne Kaplan has been grossly negligent in doing just that, without even getting into the fact that she’s a major supporter of the man running against Bennet. Relying on her as an impartial source for this story is like relying on FOX for a fair and balanced take on Democrats. You’re going to get a take, it’s just not going to be fair and balanced.
OK, OK, I get it. So, what about these termination fees?
They don’t actually exist. What we’re talking about here is what’s referred to as a make-whole provision. In a PCOPs, the only party that’s allowed to end the transaction is DPS – period. The derivative swap is based on publicly quoted Bloomberg rates (Bloomberg is the gold standard of public reporting on markets in the U.S. – that’s how Mike Bloomberg made his billions, by selling the terminals with the rate information. They’re butt-ugly things, orange type on black screens)
How it works is like this: if interest rates go down, and DPS wants to end the PCOPs, then DPS has to pay the banks a make-whole fee, which is also called a termination fee. So, yeah, not an optimal result.
However, if interest rates go up, and DPS wants to end the PCOPs, then it’s the banks that have to pay the make-whole fee.
Either way, the make-whole fee is the same in either direction. And regardless, like I said, the decision lies with the district, not the banks.
Fine, I got you. What do you man by “interest rates”, though? Is it like the ones I pay at KeyBank?
No. The way the deal worked was that DPS entered into what’s called an interest rate swap. In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty.
The most common interest rate swap is one where counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate such as LIBOR).
LIBOR, by the way, is London Inter-Bank Offered Rate. It’s what’s known as a reference rate, people use it all the time, and it’s based off what banks in London offer to each other.
The deal that Bennet & Boasberg sponsored is what I described above. DPS pays out a fixed rate, and receives a floating rate from the banks in return. In this PCOPs, the fixed amount plus fees adds up to a rate of around 6%. Currently, it stands at 6.1% – which is less than the 7.25% that a fixed-rate PCOPs would’ve cost. Certainly, it’s not the massive, onerous burden that Morgenstern makes it out to be.
Look, it’s a Friday afternoon. We’ve seen this story hashed and re-hashed and re-hashed again. There’s nothing new to see here. But I’ll close with one last point:
Haven’t fewer teachers been hired this year?
Good lord. head-desk
All school districts in this state are facing massive, draconian budget cuts. All around Colorado, you have furlough days and teachers being laid off. And we’re hiring teachers.
Sure, it may not be as many as in previous years, but chew on that again:
DPS is hiring teachers.
If things are as dire and apocalyptic as Kaplan thinks they are, then how in the hell is DPS flush enough to hire teachers?
The answer is that while things are bad, they’re never as bad as they may seem. And that it would seem that contrary to money being wasted away, it looks as if money was prudently managed.
Like I said, it’s Friday. I’m going out for a walk. It’s too beautiful for me to engage in more keyboard smashing.