Turns out Lehman Brothers and the rest of Wall Street weren’t the only ones to make risky and complex financial deals in the waning days of the credit bubble. Denver Public Schools entered into one such arrangement in April 2008 to close a $400 million gap in its pension obligations to teachers. Instead of issuing regular bonds, the district offered certificates with variable interest rates and an interest-rate swap. Then interest rates collapsed, the market for Denver's debt dried up, and now DPS is out almost as much cash as the original loan, plus another $115 million in interest and fees. It’s not alone: Los Angeles’ municipal government and a few school districts in Pennsylvania are trying to renegotiate or unwind similar interest-rate deals. But there’s more to this story than just a few bad decisions: What made these deals necessary. DPS and other districts face gargantuan pension obligations to teachers, billions more than they can actually pay. Yet these unaffordable promises are now locked into state law, or even state constitutions. Even Colorado’s momentous move earlier this year to reduce yearly automatic raises on pensions, the only such to affect current, as opposed to future, retirees, is just a drop in the bucket. Though CO’s pension fund has avoided insolvency—when “no one would have been paid anything,” as pension fund head Meredith Williams dryly points out—at least for now, it doesn’t solve the larger structural issue of government pension funds more generally. This financial crisis calls for a radical makeover.
“Exotic deals put Denver Schools Deeper in Debt,” by Gretchen Morgenson, New York Times, August 5, 2010
“Battle Looms Over Huge Costs of Public Pensions,” by Ron Lieber, New York Times, August 6, 2010