Colo. Senator Michael Bennet’s ‘Exotic’ Financial Deal Cost Denver Public Schools Millions In Interest, Wall Street Fees; Leaves Schools Deeper In Debt

The New York Times just published a lengthy and analytical front page article about Colorado appointed Senator Michael Benet’s failed  scheme to shore up $400 million in unfunded pension liabilities when he was  Superintendent of the Denver Public Schools.   The disclosure of the disastrous deal has the potential to derail Bennet’s Senate campaign.   The article confirms Dem rival Andrew Romanoff’s  Wall Street manipulator image of Bennet, and will  benefit  the winner of the Ken Buck – Jane Norton Republican primary duel should Bennet win the Democrat primary on August 10.

The deal was similar to a variable rate loan, and went bust with the financial crisis.  But built in contractual fees made the deal sweet for Bennet’s former colleagues in the investment banking business.

The bankers [JPMorgan Chase] said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs — money that could be plowed back into Denver’s classrooms, starved in recent years for funds.

To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.

Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.

The Denver schools essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments. …

Bennet claims in the article that they didn’t have any idea the financial crisis was looming, but the NYT’s Gretchen Morgenson  points out that Bear Stearns had just gone under a few weeks before the deal was inked by the school board.   The deal quickly headed south.

In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.

Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.

To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

John MacPherson, a former interim executive director of the Denver Public Schools Retirement System, predicts that the 2008 deal will generate big costs to the school system down the road. “There is no happy ending to this,” Mr. MacPherson said. “Hindsight being 20-20, the pension certificates issuance is something that should never have happened.”

A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system’s independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada.

How cozy.   And it was the supposed Wall Street expertise of Bennet that got him the job as schools Superintendent and praise for his education system expertise from Barack Obama.

Unlike many school district officials, both men were financially sophisticated and had worked together in the private sector. Mr. Bennet handled investments and structured financial deals for the Anschutz Investment Company, a private concern owned by the billionaire Philip Anschutz that has stakes in telecommunications and oil. Mr. Boasberg, meanwhile, was a deal maker in mergers and acquisitions at Level 3 Communications, a telecommunications concern.

Exotic Deal Had a Spicy Recipe

But the deal was too clever by half.

Joseph S. Fichera, chief executive of Saber Partners, a financial advisory firm that specializes in structured finance, said that the type of transaction pursued by the Denver schools was a false solution for what the issuers want to achieve — lower long-term costs — because the banks selling the deals rarely quantified all of the potential risks involved.

“The issuer [DPS] made a simple financing highly complex and took on substantial risk without knowing how large its downside could be,” he said, referring to the Denver deal. “The advisers and bankers may have disclosed that there were risks, but apparently did not help the issuer truly understand them. They typically present economic outcomes to the issuer only on projected savings and assume away any chance of the risks happening.”

The Times takes Bennet to task for claims that the JPMorgan Chase scheme is actually saving the DPS money.  And school board members contend that the downside risks of the deal were not adequately spelled out by the investment bankers who met with them or by Bennet.

But the savings cited …do not take into account termination fees associated with the complex deal. And had the school district issued fixed-rate debt, Wall Street would not have received the cornucopia of fees embedded in the more complex deal.  (Emphasis added). …

So far, Denver has paid about $9.7 million more in fees for its deal than it would have had it chosen a simpler transaction. …

Agreeing to be locked into a 30-year contract, as public entities have done, is especially costly because getting out of it requires paying penalties to the banks for every remaining year of the transaction.

Debt structuring expert Andrew Kalotay asks a rhetorical question about Bennet’s DPS deal:

“Why would the school district want to do this transaction with all the attendant risks of mispricing and the possibility of unfavorable unwind costs when they could have done a conventional, taxable fixed-rate deal?” he asked.

The Times appears to provide the answer in the next sentence:

Bankers, however, love these deals. In addition to the enormous termination fees they can snare, bankers also get remarketing fees and swap advisory fees.

Termination fees, however, top them all. Like the punishing prepayment penalties some homeowners have to come up with when paying off a mortgage early, termination fees on deals like Denver’s are essentially charges levied to rewrite the terms of a contract.

Though not explicitly saying Bennet engaged in any self-dealing, DPS board member Jeannie Kaplan felt the board was not well served by Bennet and Boasberg:

“Bennet and Boasberg had been presented as financial saviors of the Denver school system, and I sat there wanting to believe what they were saying,” she said. “The board probably should have had their own financial consultant.”

Despite the debt financing, Denver Public Schools barely made a debt in its pension fund liability.  With the plunge in the stock market, DPS still has a hole in its pension fund of about $386 million.  Nothing like having Wall Street financiers in the school system.  Just think what Bennet could do with another six years in the Senate.

Dan Maes Posts Weak Fundraising Numbers for June in Colorado Governor’s Race

Dan Maes, the grassroots Republican candidate for Colorado governor, reported less than $32,000 in campaign contributions for the June reporting period, according to his filing with the Secretary of State’s office late Tuesday night.  By contrast, his Republican primary opponent, Scott McInnis, posted a respectable $170,000.  And Democrat John Hickenlooper, raised over $500,000.

This low contributions number has to come as a disappointment to Maes supporters, as it is the first reporting period following Maes’ upset victory at the State Assembly, where Maes edged out establishment candidate, Scott McInnis.  The campaign hoped the assembly win would convince contributors that Maes could win and backing him would be a good political investment.  But the $32,000 total is essentially the same as what the Maes campaign raised in the prior reporting period.

Worse, the low fundraising report follows on the heels of news that Maes has  just agreed to settle campaign finance violation charges with a fine of  over $27,000.  The violations involved improper reimbursements from the campaign to Maes directly for such things as mileage expenses.

Both of these campaign finance developments, combined with a recent poll,  mean that Scott McInnis really is the only Republican candidate who can beat the popular, liberal Dem in moderate drag, Denver Mayor John Hickenlooper.  Hopefully, McInnis will hop off  his lofty perch, talk to the mainstream media and the bloggers, and stir up the grassroots base and fiscally conservative independents.  Coloradans literally cannot afford a Hickenlooper victory.

Joe Gschwendtner Submits Almost 17,000 Petition Signatures in Late Bid for GOP Governor’s Race: Joe G Would Face Maes and McInnis in Primary – UPDATED 5-31

Joe Gschwendtner, or “Joe G” as he dubs himself,  submitted just under 17,000 signatures in his petition bid  for a late entry on the GOP primary ballot in the Colorado governor’s race, according to his campaign.  If the petition effort is successful, Gschwendtner, a wealthy business workout specialist from Castle Rock, will face former Colorado Congressman and lawyer-lobbyist, Scott McInnis, and businessman Dan Maes, in the August 10 primary.

Joe G’s ballot spot is not a done deal yet, though.  The Secretary of State’s office will check each signature against voter registration roles to ensure the campaign submitted 10,500 verified signatures of registered Republicans, with at least 1,500 from each of Colorado’s  seven congressional districts.  They will announce their decision by June 11.

The latter requirement proved pivotal in Colorado’s last governor’s race in 2006.  After failing to gain enough votes to make the primary ballot against former Congressman Bob Beauprez, former DU president Marc Holtzman submitted petition signatures that well exceeded the 10,500 required.

After completing the verification process, however, the Secretary of State ruled Holtzman failed to meet the 1,500 threshold in two congressional districts. Holtzman then initiated a bitter court fight that some believe might have been responsible for saddling Coloradans with current gubernatorial nightmare, former career prosecutor Bill Ritter.

The two other statewide candidates facing the same signature requirements,  U.S. Senate Candidate Jane Norton, and treasurer hopeful Walker Stapleton, left greater margins for error. Norton turned in about 35,000 signatures and Stapleton delivered 27,000 to the Secretary of State for verification.  They also had more time to collect the signatures.  Joe G’s late entry also forced him to rely primarily on paid signature collectors.  According to election law experts, including Republican Secretary of State candidate Scott Gessler,  paid collectors with a tight deadline typically produce a higher percentage of invalid signatures, as was the case for Holtzman in 2006.

Gschwendtner entered the race about two months ago on a platform to get Colorado on the fast track to economic recovery and with the promise of  having enough of his own  money to run a winning campaign.  As of April 25, he put  $129,000 into the race, and raised another $15,500, according to campaign finance reports.  A report for the most recent 30 days is due June 1.

Joe G’s “Vision 2014” plan promises to immediately cut $1 billion in inefficient government spending and to lower  Colorado’s unemployment rate to 4 percent by 2014.  He touts his experience as a workout specialist turning failing businesses around in a 30-year career in a video interview with Ben DeGrow.

The focus of Joe G’s campaign thus far, however,  has been to attack grassroots favorite Dan Maes, whom he had hoped to oust from the race at the Assembly stage.   Some, such as Reclaim the Blue blogger, Al Maurer, contend Joe G might be working in concert with Scott McInnis to split the anti-establishment vote.

Besides Gschwendtner’s Maes-centric focus, other evidence of  possible coordination with McInnis includes harsh attack robo-calls against Dan Maes using the same out-of-state robo-call company employed by McInnis.  Critics also pose the question about how Joe G, not yet an official candidate, could have obtained a delegate list.

Maurer observed what looked like  hired homeless people carrying signs for Joe G at the State Assembly.  Ben DeGrow put Joe G in the “loser” category in his review of the aftermath of the State Assembly.   He pointed out that Joe G’s campaign spokesman boldly predicted to the Post’s Lynn Bartels before the assembly vote, “after Dan doesn’t get his 30 percent, it will be McInnis and Gschwendtner.” In fact, Maes edged out McInnis and gained the top line of the ballot.  DeGrow observed,  “McInnis’ party establishment backing and Maes’ outstanding grassroots showing leave [Joe G] very little political oxygen.”

Gschwendtner’s two recent radio ads are high quality,  focus on the economy, and criticize McInnis in particular and “career politicians” in general.   So maybe the Maes attacks were a strategy limited to the assembly stage.  The video interview with DeGrow supports this possibility to some extent, as Gschwendtner talks game theory with Ben in describing his Maes attacks.

Assuming Joe Gschwendtner makes it through the petition process, no one can dispute  we’ll be looking forward to a contentious and entertaining GOP gubernatorial primary campaign.

Update 5-31. Joe G campaign spokesman Kyle Fisk told me this morning Plan A was to knock Maes out to make it a two-way race.  That was the logical strategy at the time.  Now it’s a three-way race and they’v adusted their strategy accordingly.

Fisk said he doesn’t believe Maes is electable in the general and that Assembly delegates are party insiders who don’t represent the views of Republican voters.  He said Maes has spent 14 months campaigning to persuade less than 2,000 people to vote for him.

Update: 5-31 – Al Maurer at Reclaim the Blue just posted a detailed analysis of Joe G’s campaign finance reports, and finds interesting info about the petition company he used.  Tom Wiens may have had problems with the same company, Silver Bullet. Don  Johnson’s take on Joe G’s candidacy.