On April 24, 2008 the Denver Public Schools agreed to borrow $750 million dollars from some of America’s top financial institutions for its outstanding pension debt. As I write this blog this morning February 12, 2019 Denver’s teachers have entered the second day of their first strike in 25 years. The amount of money being contested is somewhere less than one-half of one percent of the overall DPS budget. 0.04%. Less than $10 million out of $1.4 billion. The following tells some of the complicated story that connects these two events.
The $750 million taxpayer debt was divided this way: $300 million was to pay back already existing pension debt, $400 million was to fully fund the DPS retirement fund. The remaining $50 million went to legal and financial fees. By the time this transaction was “fixed out” in 2013 a veritable Who’s Who in the Wall Street world was involved: RBC Capital Markets, Goldman Sachs, JPMorgan, Citibank, Wells, Fargo, Bank of America. Part of the incentive to borrow this money was so DPS’ stand alone retirement fund could join the statewide retirement fund (Colorado Public Employees Retirement Association or PERA for short) which would in turn allow for more employee mobility into and out of DPS and would reduce DPS’ annual retirement contributions which would in turn provide more money for classrooms. Because of previous financial miscalculations DPS was paying more per pupil for its retirement fund than any other school district in the state. Had this deal not been executed, the dollars paid to banks and lawyers could have been put directly into the DPS retirement fund itself. The DPS Superintendent at the time: Michael Bennet. The Chief Operating Officer: Tom Boasberg.
Bennet and Boasberg came from the business world and were heralded as financial wizards. (They were boyhood friends growing up in Washington, D.C. together). Bennet had worked for billionaire Phil Anschutz and had already demonstrated a skepticism toward public pensions. Boasberg arrived at DPS from Level 3 Communications, “an American multinational telecommunications and Internet service provider” where he was a mergers and acquisition guy. Long story short they, along with bankers and lawyers concocted this very complicated and risky transaction using taxpayer money. They were convinced that despite what was happening in the financial world at the time, DPS was going to save millions of dollars in pension costs.
Remember back to 2008. And remember we are talking about public, not private, money. In February the auction rate securities froze. In March Bear Stearns went under. There were many indicators that something big could be going on in the world financial markets. Nevertheless, in April the DPS board was encouraged to proceed with the high risk transaction which relied on the weekly LIBOR rate (it is the primary benchmark, along with the Euribor, for short-term interest rates around the world. Libor rates are calculated for five currencies and seven borrowing periods ranging from overnight to one year and are published each business day by Thomson Reuters.), swaps, (A swap is a derivative in which two counterparties exchange cash flows of one party’s financial instrument for those of the other party’s financial instrument. The benefits in question depend on the type of financial instruments involved.), bonds that were auctioned weekly. And here is the headline from that deal. In 10 years that $750 million loan has ballooned into twice as much debt ($1.8 BILLION) and only for the past two years has the district begun paying any principal. And simultaneously, Bennet and Boasberg were able to convince the Colorado legislature that DPS should get the equivalent of “pre-payment” credit to deduct the PCOPs fees and interest from what would have been their normal pension contributions. Because of these actions DPS employees have witnessed their pension fund drop about 20% fromfully funded on January 1, 2010 to a little under 80% funded in June 30, 2018. But as Bennet and Boasberg would say as this defunding is occurring, “we are making our legal contributions, ” to which one must add, “Legal, but is it ethical?”
This story has become very relevant today because after 15 months of negotiations the district and the teachers have been unable to reach an agreement. Denver’s teachers have gone on strike over a compensation system called ProComp (Professional Compensation). And the ProComp fight comes back to the pension.
In 2005 Denver voters approved a $25 million tax (adjusted for inflation) for teacher pay-for-performance incentives. A few thousand dollars was awarded for teachers who worked in hard to serve schools and taught hard to teach subjects. The awarded dollars ($500-$2500) was intended to permanently raise base salaries. It was reliable raise and it was PENSIONABLE.
In 2008 – hum, is this a coincidence? – the ProComp “bonus” went from a completely base building system to a yearly one-time bonus system. And to further complicate matters, new bonus criteria (based primarily on high-stakes testing) have since been added. The result has been teachers cannot tell how much they will be making from year to year. Some have said they can’t even tell how much they will make from paycheck to paycheck. Oh, and of course, these bonuses do not contribute to a teacher’s PENSIONABLE income resulting in…less retirement money for retiring teachers, and simultaneously smaller demands on a dwindling pension fund.
While all this business bonus mess has been imposed in Denver, surrounding school districts have far surpassed Denver’s base pay scale, resulting in very high teacher turnover for DPS and a dwindling number of long serving professionals. Teachers are retiring earlier, teachers are leaving the district, and sadly teachers are leaving the profession. And because Denver is the quintessential reform district, DPS has been very welcoming to the reform idea of hiring short term, unlicensed educators with non-traditional training. Think six week training programs. The result of all this brilliance: fewer long serving employees resulting in less demand on a pension fund. So the conflation of financial wizardry and education reform has hit Denver: businessmen Bennet and Boasberg take over the finances of a public school district, concoct a complicated and risky scenario during an unstable financial time, get the legislature to allow the defunding of the pension, implement a bonus based pay system to replace base-building, and voila – a strike by Denver’s teachers for a fair, reliable, sustainable pay system.
One more important headline. ProComp bonuses for teachers range from $500-$3000 per category per year. Last month a list of administrative bonuses without a rubric as to how the money has been awarded became available: the current COO (Boasberg’s first job in DPS) received a $34,000 (!) bonus on top of his $198,000 salary, an “IMO executive principal” got $36,900 on top of his/her $130,000. An IMO executive principal is the newest layer of reform administration. He/she oversees a network of innovation schools (non union schools overseen by the district) and makes two to three times as much as a DPS teacher. There are approximately 10 such positions with each person gathering around $20,000 in bonuses. These bonuses are not part of the ProComp agreement but rather come out of the DPS general fund. Just imagine. You could save almost half of the 8 million dollars they two sides are bickering over if you just eliminated these positions and the bonuses.
We must never end any story about Denver Public Schools without a reference to educational outcomes, for isn’t the first priority of a public education system educating its students? After 15 years of education reform brought by Michael Bennet and Tom Boasberg, 42% of Denver’s students are proficient in English Language Arts and 32% proficient in math. Bennet and Boasberg financial actions have also contributed to the doubling of the pension debt, and their policies have resulted in the first teacher strike in 25 years in Denver. Quite a legacy left by the boys from D.C.