Friday, April 18, 2014
Inquirer Daily News

Auditor: Millions in Philly school savings 'mere illusion'

No one is being held responsible for a multi-million-dollar loss that enriched Wall Street banks at taxpayers' - and schools' - expense

Auditor: Millions in Philly school savings 'mere illusion'

It's bad enough, says PA Auditor General Jack Wagner, that the cash-strapped Philadelphia school district, with mass layoffs looming, had to pay $63 million last fall (on top of previous losses) to buy out interest-rate swap contracts that enriched Wall Street firms at taxpayers' expense.

It's worse, Wagner claims, that the School District says the swaps weren't all that bad. According to the district, swaps saved the district $28 million below what fixed-rate debt would have cost without swaps over the years, and the swaps and the bonds they were supposed to insure have been replaced with cheap variable-rate debt, at a 2010-12 savings of $25 million, and an ultimate saving estimated at north of $50 million.

That second saving "is a mere illusion" because it is likely to be at least partly wiped out by rising interest rates, Wagner says in a letter accompanying his report.

School District business manager Michael Masch rejects that claim. He says the $25 million represents net present value savings to the cost of the refinanced debt, and that  savings could rise, if interest rates stay low. He also blames Wagner for posting his report without giving the district the usual courtesy of time for a full review and reply.

I asked Masch if he could tell me who convinced Philadelphia to buy those swaps, and who, in addition to the Wall Street banks, made money selling them to the city? He said those 10-year-old records are hard to find, especially in the middle of a school funding cuts that could result in massive layoffs.

I asked Wagner who's to blame for the swaps, which, after all, pre-date Masch and school board boss Arlene Ackerman. He hasn't gotten back to me yet. So for now, this looks like the current politicians blaming the former politicians, and no one having to take responsibilty for convincing the School District to waste millions it can't afford.

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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