The Swap

 State College swap goes national

PUBLISHED AT CENTREDAILY.COM

TUESDAY, MAY 24, 2011

BY BOB HEISSE, EXECUTIVE EDITOR OF THE CENTRE DAILY TIMES

Just want to share the link to the Wall Street Journal’s story today on the State College Area school district swap arrangement with the Royal Bank of Canada.

We’re reported all of this over time, and schools reporter Ed Mahon has won a statewide first place for investigative reporting for his work.

The Journal put this together for its huge readership

Read more: State College swap goes national.

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Royal Bank offers swap settlement

PUBLISHED IN THE CENTRE DAILY TIMES

THURSDAY, APRIL 21, 2011

BY ED MAHON

Officials from the Royal Bank of Canada threw down a May 1 deadline for the State College Area school board members to resolve the lawsuit between the two sides.

With that date looming, the bank offered a solution:

The district can cancel half of the interest rate swap and pay the bank a $4.75 million termination cost.

The other half of the deal would remain intact — which the district could use to finance renovations at elementary schools.

Read more:  Royal Bank offers swap settlement.

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Swap due for State College Area school  board

Members say they won’t pay pending lawsuit with bank.

PUBLISHED IN THE CENTRE DAILY TIMES

MONDAY, DEC. 1, 2010

BY ED MAHON

It’s swap day for the State College Area School District.

A complex financial contract that school board members entered into in April 2006 and amended in November 2007 is scheduled to take effect today.

Under the agreement, the district and the Royal Bank of Canada are set to exchange payments, totaling $24.5 million at the very least, for the next 17 years.

But the district wants out of the deal and in August filed a lawsuit in federal court arguing that the contract should be declared void.

While the case is ongoing, the district doesn’t plan to give any money to the bank.

Read more: Swap due for State College Area school board.

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Royal Bank of Canada responds to State College Area School District lawsuit

PUBLISHED IN THE CENTRE DAILY TIMES

THURSDAY, OCT. 28, 2010

BY ED MAHON

State College Area School District’s legal fight with the Royal Bank of Canada continued Wednesday, as the investment bank filed a motion before a federal judge accusing the district of seeking a “Court-ordered bailout.”

At stake is about $10 million of taxpayer money — although the exact cost rises and falls daily, depending on fluctuations in the financial markets.

Read more: Royal Bank of Canada responds to State College Area School District lawsuit.

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State College Area school board picks new financial adviser

PUBLISHED IN THE CENTRE DAILY TIMES

TUESDAY, SEP. 28, 2010

BY ED MAHON

State College school board members appointed a new bond counsel and financial adviser — distancing themselves from the legal and financial experts who helped the district enter its controversial, and potentially costly, interest swap deal with the Royal Bank of Canada.

In separate votes Monday night, the board voted 9-0 to replace the Harrisburg law firm Rhoads and Sinon and Public Financial Management, whose website says it represents more than 200 Pennsylvania school districts.

Read more: State College Area school board picks new financial adviser.

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State College school district sues bank over swap deal

PUBLISHED IN THE CENTRE DAILY TIMES

WEDNESDAY, SEP.1, 2010

The State College Area School District has filed a federal lawsuit against the Royal Bank of Canada, arguing it should not have to pay about $10 million to terminate a financial agreement the two sides entered into in 2006 and amended in 2007.

The district says the qualified interest rate management agreements, known as swaps, are invalid because they didn’t follow all of the provisions of the Pennsylvania Local Government Unit Debt Act — a state law the General Assembly amended in 2003, clearing the way for schools and municipalities to engage in swaps.

“The 2006 and 2007 swaps are unenforceable ‘naked’ swaps, because they do not relate to bonds issued or to be issued by SCASD,” the district says in the lawsuit, filed Monday in the U.S. District Court for the Middle District of Pennsylvania.

Royal Bank of Canada officials called the lawsuit “without merit.”

Read more: State College school district sues bank over swap deal.

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State College board reconsiders resolution to terminate swap deal

PUBLISHED IN THE CENTRE DAILY TIMES

TUESDAY, JUNE 22, 2010

By Ed Mahon

State College Area school board members may no longer be willing to pay the Royal Bank of Canada up to $5.5 million to get out of its interest-rate swap deal.

The board’s scheduled to vote tonight to rescind a Feb. 22 resolution and authorization that gave the go-ahead to terminate the deal, known as a qualified interest rate management agreement, if the total termination cost for the district dipped below $5.5 million.

Read more: State College school board reconsiders resolution to terminate swap deal.

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State College swap: Canceling deal may cost more than $5.5 million

PUBLISHED IN THE CENTRE DAILY TIMES

FRIDAY, MAY 28, 2010

By Ed Mahon

In February, the State College Area school board voted 8-1 to cancel the district’s financial contract with the Royal Bank of Canada if the cost to do so dipped below $5.5 million.

At the time, board President Ann McGlaughlin said that the $5.5 million threshold might not be high enough.

So far, she’s been right. The cost of terminating the swap was $8.81 million last week.

Read more: Canceling deal may cost more than $5.5 million.

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State College area school board OKs hiring swap counsel

PUBLISHED IN THE CENTRE DAILY TIMES

MONDAY, MAY 25, 2010

BY ED MAHON

State College Area school board members unanimously approved hiring a law firm to examine whether the district should sue the Royal Bank of Canada,

The district entered a qualified interest rate management agreement, or swap, with the bank in April 2006 and renegotiated the terms in November 2007.

The board’s original goal was to finance a high school construction project that was later canceled. And several economic variables have turned the complicated deal into a financial liability for the district.

Read more: State College area school board OKs hiring swap counsel.

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State College board considering swap suit

PUBLISHED IN THE CENTRE DAILY TIMES

MONDAY, MAY 24, 2010

BY ED MAHON

State College Area school board members are considering filing a lawsuit against the Royal Bank of Canada, the bank that the district expects to pay millions of dollars to as a result of a complex and risky financial contract that began in April 2006.

That deal — known as a qualified interest rate management agreement, or swap — is likely to cost the district more than $6 million.

Read more: State College board considering swap suit.

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Swap could cost district

SUNDAY, OCT. 1, 2009

BY ED MAHON

In April 2006, the State College Area school board approved a complex and risky financial contract with the Royal Bank of Canada in an attempt to secure a low interest rate on $58.05 million worth of debt.

The district planned to borrow the money for a high school construction project, but not until sometime in 2007.

The idea was that the district would borrow that money from a bondholder at a variable interest rate.

At the same time, it would enter into an interest rate swap with the Royal Bank of Canada — the district would pay the bank a fixed interest rate on $58.05 million, and the bank would pay the district a variable interest rate on the same amount.

The hope was the variable rates would cancel each other out, leaving the low fixed rate as the district’s main cost for the loan.

But three and a half years later, the high school project has been scrapped, the district has yet to actually take out the loan, and interest rates have fallen further instead of rising as district financial advisers had predicted.

And the district is still committed to an interest rate swap with the Royal Bank of Canada, a deal that could cost the district millions of dollars.

“The economy changed dramatically enough that it no longer became a useful tool and now it’s a massive liability,” said board member Jim Pawelczyk, who was appointed to the board in March 2008. “The district and ultimately taxpayers stand to incur a multimillion dollar cost for which they will receive nothing. And that saddens me. It really does. It saddens me as a taxpayer. It saddens me as a board member.”

Read more: Swap could cost district.

Sidebar: Timeline of events in swap deal.

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Fix sought for swap deal

SATURDAY, Nov. 21, 2009

The State College Area school board plans to bring in a financial consultant whose advice helped cost the Bethlehem Area School District at least $10.2 million, according to an investigative report by Auditor General Jack Wagner.

Reached by phone Thursday evening, four board members said they had been unaware of the connection.

“I’ll take whatever he says with a grain of salt,” board President Rick Madore said. “Honestly, I’m not sure that I trust anybody at this point.”

Read more: Fix sought for swap deal.

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Auditor general seeks ban on swaps

PUBLISHED IN THE CENTRE DAILY TIMES

THURSDAY, Nov. 19, 2009

BY ED MAHON

Auditor General Jack Wagner called for the repeal of a 2003 law that paved the way for the State College Area school district to enter into a complex and risky financial transaction with the Royal Bank of Canada.

The district has $53.9 million tied up in a qualified interest rate management agreement, or “swap,” that could cost it millions to terminate.

“School districts and local governments should not be gambling with public money, and that’s precisely what they’re doing with swaps,” Wagner said during a news conference Wednesday in Harrisburg.

Read more: Auditor general seeks ban on swaps.

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Swap decisions difficult

State College board missed opportunity to end contract

Second of two parts

PUBLISHED IN THE CENTRE DAILY TIMES

SATURDAY, OCT. 24, 2009

BY ED MAHON

The State College Area school board canceled its $100 million high school construction project May 21, 2007, after five challengers rode a wave of anger to sweep the primary election. The district had already spent about $5 million planning the project.

More than a month later, the district could have terminated its interest rate swap contract with the Royal Bank of Canada — originally entered into as a means of financing the high school project — at a cost of $168,623, according to a Public Financial Management report generated on July 2, 2007.

That’s 45 times less than it would have cost the district to terminate the contract earlier this month: $7.7 million, which equals more than half what the district plans to spend constructing the new Boalsburg-Panorama Village elementary school.

“In hindsight, we missed an opportunity, that’s clear,” said school board member David Hutchinson, who was a representative to the citizens advisory committee for finance. However, he said board members still felt the interest the district would pay would be favorable, and didn’t really focus on the idea of terminating the swap.

Hindsight aside, data was available to show that $168,623 was significantly less than what it would have cost the district to terminate the swap any time in the nine months leading up to the cancellation of the high school project.

Read more: Swap decisions difficult; State College board missed opportunity; second of two parts.

Sidebar: Changing Costs.

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Swap could cost millions

First of two parts

PUBLISHED IN THE CENTRE DAILY TIMES

FRIDAY, Oct. 23, 2009

BY ED MAHON

When financial adviser Lou Verdelli first introduced the idea of an interest rate swap to State College Area school board members, he told them to focus on the solid arrow.

That flat line could let them pay an interest rate of less than 4 percent on $58.05 million of debt for 20 years.
“That solid line is representing something that’s not changing, so a fixed rate. … That gives us budget certainty, that eliminates a lot of interest rate risk on a large amount of the financing that’s needed for the project,” Verdelli, then a managing director of Public Financial Management Group, told the board at a Feb. 27, 2006, meeting. “So that’s the most important part of what goes on on page four.”

Page four of the report contained information on three other moving pieces in the agreement, which have all changed to work against the district’s interests.

Board members say they were properly informed of the other risks involved in entering into an interest rate swap agreement with the Royal Bank of Canada. But a Centre Daily Times analysis shows that in today’s financial market, the district now stands to spend at least $8 million more by activating the agreement than it would by incurring similar debt through standard fixed rate bonds.

Documents obtained from the school district after a request under Pennsylvania’s Right-to-Know law, recordings of previous meetings and interviews with financial experts and those involved in the swap deal reveal that several decisions brought the district to the point where it is today. The district:

* Issued but did not incur debt before an Act 34 Hearing on the proposed high school project so as to avoid a voter referendum on a tax increase;

* Relied on advice from a committee whose meetings were not open to the public;

* Missed an opportunity to terminate the swap contract for the cost of $168,623.45 on June 29, 2007, more than a month after the board approved ending the high school construction project. Five months later, the district paid $104,000 in fees to push back the activation date of the swap from Dec. 1, 2007, to Dec. 1, 2010;

* Incurred greater risk by pushing back the activation date of the swap.

“Even if the swap is reasonably fair on entry, the municipalities … tend to get really nailed when they modify the terms,” said Andrew Kalotay, the head of a New York City-based firm that advises corporations and municipalities on debt management, bond valuation and derivatives. “It goes from bad to worse.”

Read more: Swap could cost millions; first of two parts.

Sidebar: Cost to the district so far.

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