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.