Three years of falling real estate prices, and three bad bets placed with a giant Wall Street bank, have pushed Philadelphia's city-run Girard Estate to make drastic cuts in Girard College, the free boarding school set up by Philadelphia's richest citizen in his will 180 years ago.
"We have downsized the school," Joseph S. Martz, executive director of the Board of City Trusts, which manages Girard's $500 million in investments, told me in his office yesterday. Girard College still has 50 students enrolled in this year's senior class, but is "only taking 24 first graders." Enrollment peaked at 752 in the fall of 2007; it fell to 532 in September; Martz says it will likely go below 400 over the next few years. School staff has dropped to 205 from a high of 269. There's still plenty of kids trying to get in, but the city has had to turn more away.
When he went to work managing the estate four years ago, Martz had hoped to diversify Girard's holdings. The estate owns office buildings in Philadelphia and upstate cities, and Schuylkill County hard-coal fields (where contractors also harvest timber and hope to find gas), much of it inherited from Stephen Girard in his will 180 years ago. The estate promptly raised $88 million leasing its headquarters building, currently run by SSH Management LLC, and plowed that money into real estate funds and new buildings, including 3501 Island Ave. in Southwest Philadelphia, leased and occupied last week by Deutsche Bank AG's trucking affiliate, DB Schenker.
Revised: But when investment markets collapsed in the fall of 2008, the value of Girard's securities portfolio fell from over $400 million to around $250 million. Meanwhile real estate buyers vanished, making properties tougher to sell.
The trust will run Girard College this year on a $23 million budget, from income generated by both its real estate and other investments, which together are currently worth half a billion dollars. Martz has cut the estate's administrative expenses nearly in half, to $1.8 million, leaving jobs like director of real estate and director of facilities vacant. The estate's staff now totals 17, down from 72, due partly to buildings sales. The estate spends another $20 million a year on real estate management, which is more than covered by rents, according to a report last week by Standard & Poor's.
Revised:Girard has trimmed its debt from $181 million in the early 2000s to $155 million, and the trust has set aside millions more to pay back a $42 million mortgage on a property it owns, the Aramark tower, by its due date in 2012. Once that's paid down, "I think it's quite an attractive sale candidate," Martz told me.
But low interest rates have further hammered investment returns, and also increased bleeding from a string of interest rate "swaps" the city placed with the giant Wall Street bank JPMorgan Chase & Co. in connection with bonds the estate sold in 1999, 2001, and 2002. JPMorgan has defended its swaps as legitimate financial-planning tools.
The swaps were suppose to protect Girard from rising interest rates. Instead they've cost millions, based on what turned out to be an uneven trade: The estate pledged to pay JPMorgan around 5% interest on the bonds, in exchange for floating-rate payments from the bank. The bank's payments were set at prices based on the arcane Securities Industry and Financial Markets Association Municipal Swap Index, which yielded around 5% when the swaps were made, but is currently yielding under 1% as U.S. interest rates remain at record lows. Girard has to pay the difference.
Girard now owes a cumulative $29 million on the swaps, more than a year's budget for Girard College. It hasn't had to pay out the cash; it's using properties it owns as collateral, instead. But that arrangement kept the estate from being able to sell some of its buildings to raise more money, Martz told me.
Other Philadelphia institutions, from the School District to the Delaware River Port Authority, have lost tens of millions more from swaps, which enriched financial advisers while impoverishing taxpayers and tollpayers. Bloomberg LP estimated yesterday that state and local governments have paid Wall Street banks a collective $4 billion in recent years for these interest rate bets gone wrong.
As Martz notes, the swaps could still end up making money for Girard - if interest rates recover before the swaps expire years from now. A real estate recovery would help a lot more. But it won't likely come soon enough for Girard College's next few entering classes. "We will stay smaller," says Martz, until the markets come back.