What Wall Street Cost Denver's Schools

Colorado’s diverse economy, recently given a boost by revenue from legal marijuana distribution, is generally in good shape. But as of early 2016. Denver Public Schools, the largest school district in the state, was hobbling economically, cutting as many as 170 faculty and staff positions. 

Wall Street had devastated DPS by collecting hundreds of millions of dollars in termination fees on swap deals—as much as $215.6 million “unwind” interest rate swaps the district had hoped would cut pension costs back in 2008. That figure was equivalent to two-thirds of the district’s annual teaching expenses.

Like many districts, cities, and states, DPS hadn’t adequately funded their pensions up front—a symptom of the public sector’s failure to think outside of the box on funding paradigms, exacerbated by widespread propaganda in the late 1990s and early 2000s that Wall Street could assist local governments in making their dollars go further. Left without adequate pension funding, in a strong anti-tax climate endemic to Rocky Mountain states, DPS accepted complex financial deals with Wall Street to ensure its benefits. JPMorgan Chase had promised DPS $750 million, and a savings of tens of millions of dollars per year, in the debt swap scheme, and then promptly produced the opposite result. In 2011, the district paid out nearly 20 percent of its annual payroll in termination fees. In 2013 DPS paid $140 million in termination fees to Wells Fargo. And then, this year, the $216 million to get out of the rest of the deals.

A large amount of the $216 million consisted of fees paid to underwriters and other private sector professionals to handle the money. These services, along with a range of alternative financing options, could have been provided under a public financing system that prioritized the stakeholders—DPS students and employees, and the surrounding community that benefits from equitable education—over shareholders and highly-paid outside managers. 

 

Sources

Darrell Preston, "Denver Pays Wall Street $216 Million as Swaps Fail," Bloomberg Business News, May 10, 2013

Gretchen Morgenson, "Exotic Deals Put Denver Schools Deeper in Debt," New York Times, August 5, 2010 

Heather Draper, "DPS sells bonds to fix out remainder of 2008 pension deal," Denver Business Journal, April 7, 2013 

Russell Haythorn, "Denver Schools to cut more than 170 jobs due to budget cuts," The Denver Channel, January 20, 2016

This story is part of PBI's ongoing project, What Wall Street Costs America. Please support the project here, and learn more about it--including how you can be one of our researchers and storytellers--here. Also, feel free to download and share the graphic below! 

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