Yet another city is suffering the consequences of hitting up the Wall Street casino to fund its pension system. Bloomberg reports that Denver’s public school system has paid a total of $215.6 million to Wall Street banks related to swaps and bond sales made since 2008—equal to two-thirds of total teaching expenses for one year.
We’ve heard this story before. The problems began when Denver’s public school system, looking to plug a $397.8 million hole in its teacher pension system, turned to riskier Wall Street investments rather than raising revenue or cutting spending. The bets didn’t pay off, and meanwhile the city government has raised property taxes by a whopping 26 percent to fund education. Unfortunately, this comes after Wall Street got its big payday:
Denver schools wound up doing a bond deal in 2011, along with last month’s, to convert the 2008 bonds to fixed-rate and exit swaps. The $215.6 million paid to unwind swaps as well as fees for new bond sales has eroded money the district set out to save for its pension plan. Besides the swap termination payments, the cost includes fees to underwriters and other professionals[...]
“We’ve lost hundreds of millions of dollars on deals we never should have been in,” said Jeannie Kaplan, a district board member who said she voted for the 2008 borrowing and then began pushing to end it in 2010. “Public institutions with elected boards shouldn’t be in these kinds of transactions. Our responsibility is to use the public’s money in a judicious way.”
By their own admission, district board members didn’t know anything about the bond market. This should have been the first warning sign that this may have been a bad idea.
Other cities facing pension shortfalls should take note of Denver’s struggles. Keeping pension plans underfunded in the hopes that future generations will pick up the slack is rarely a good idea; relying on the Wall Street casino to make up the difference is a worse one. Instead, public officials and fund managers should, at a minimum, keep their plans reasonable, adequately funded and gimmick-free. Perhaps the best option, however, would be to make the switch from defined-benefit to defined-contribution plans.
[Wall Street image courtesy of Shutterstock]