Swap decisions difficult: State College school board missed opportunity

Ed Mahon

SECOND OF TWO PARTS

The State College Area school board canceled its $100 million high school construction project May 21, 2007, after five challengers rode a wave of anger to sweep the primary election. The district had already spent about $5 million planning the project.

More than a month later, the district could have terminated its interest rate swap contract with the Royal Bank of Canada — originally entered into as a means of financing the high school project — at a cost of $168,623, according to a Public Financial Management report generated on July 2, 2007.

That’s 45 times less than it would have cost the district to terminate the contract earlier this month: $7.7 million, which equals more than half what the district plans to spend constructing the new Boalsburg-Panorama Village elementary school.

“In hindsight, we missed an opportunity, that’s clear,” said school board member David Hutchinson, who was a representative to the citizens advisory committee for finance. However, he said board members still felt the interest the district would

pay would be favorable, and didn’t really focus on the idea of terminating the swap.

Hindsight aside, data was available to show that $168,623 was significantly less than what it would have cost the district to terminate the swap any time in the nine months leading up to the cancellation of the high school project.

The swap contract began on April 25, 2006, and for the first four months the cost to terminate stayed below $550,000, dropping at one point as low as $4,261.

But, as long-term interest rates dropped, getting out quickly became more expensive.

The termination fee rose to $1.38 million in August 2006, reached $2.6 million by November 2006, and was $1.7 million in April 2007.

Business manager Dennis Younkin planned to discuss the possibility of terminating the swap with Public Financial Management advisers on June 20, 2007, according to the minutes from a citizens advisory committee for finance meeting. At that time it would have cost the district $168,623 to terminate the agreement.

But the board didn’t receive a presentation from Public Financial Management until July 23, 2007. John Frey, PFM representative, told the board that the cost to terminate was between $300,000 and $400,000.

“I think either way you have two good options here,” Frey told the board, saying they could either terminate the contract or postpone the activation date of the swap from Dec. 1, 2007, to Dec. 1, 2010.

The latter option would mean the district would pay a higher interest rate on the $53.9 million of debt.

At the time, board members and financial advisers assumed that the swap agreement would still be used to help finance a future construction project and that interest rates would rise.

“It’s still a good interest rate, so either way we’re kind of in a win-win situation,” board member Lou Ann Evans said at the July 2007 meeting. “We’re not hurting ourselves if we have to use alternative two.”

The board took no action at that meeting.

By July 31, 2007, the cost to terminate was $655,173, according to a Public Financial Management report.

In August 2007, the board voted to cancel the swap contract if the cost of doing so dropped to zero.

At a Nov. 9, 2007, meeting, the citizens advisory committee for finance decided that it would give no formal recommendation to the school board on whether it should push back the activation date of the swap. The same committee had recommended entering into the swap in April 2006.

Later that November, the board voted to push back the activation date to December 2010. In addition to a higher interest rate, pushing back the date also meant the district would have to pay $104,000 in fees to the Royal Bank of Canada and three different financial and legal advisers.

During the month of December 2007, when all five new board members took their seats, the cost to terminate the deal ranged from $3.27 million to $4.19 million. The lowest the termination fee ever reached on their watch was $2.37 million on Feb. 19, 2008.

“I suppose we could have cut it and terminated the deal. That really wasn’t at the top of our minds at that point. I wish it had been,” said board President Rick Madore. However, he added, “I think we would’ve gotten some push back.”