State College Area school board agrees to pay $9 million in swap settlement with Royal Bank of Canada

The ill-fated interest rate swap with a Canadian bank in 2006 to finance a State College Area High School renovation project has cost the district taxpayers $9 million.

That is the amount of a settlement reached between the district and the Royal Bank of Canada and approved by the school board on Monday. Officials said the district resorted to settling a lawsuit, which was filed in August 2010 to void the swap agreement, after a federal judge in October ruled that the swap was valid.

The money to pay for the settlement will be pulled from a reserve account, and Superintendent Robert O’Donnell said the district can bear the cost of the settlement without a hit to its educational programs, and he told the board Monday that it is unfortunate the district had nothing to show for the money it paid out.

The school board issued a joint statement Monday, in which they explained the background of the deal and summarized the financial hurt incurred to the district.

“We profoundly regret that from inception to termination, many millions of dollars will have been spent on this transaction with no benefit to public education,” the school board said in the statement. “While this is a difficult outcome to accept, we are asking for the community’s support as we put this expensive chapter in the (d)istrict’s history behind us.”

School Director David Hutchinson, who was on the board that approved the swap in 2006, said the directors thought they were making a “prudent decision” to get a low interest rate when rates looked as though they would go up.

“From the beginning all the way through the last year or so, the members on the board always tried to do the right thing,” Hutchinson said after the meeting. “They tried to make the best decision they could with the information they had at hand.”

According to the settlement, the district will pay $6 million by a wire transfer to the bank within two weeks. The rest of the money will be paid out over five years.

The settlement ends up saving the district $1 million it would have had to pay in fees to terminate the swap.

The district will recover $160,000 from financial advisers they consulted during the swap matter. The law firm of Rhoads and Sinon LLP, which was the district’s bond counsel for the swap, owes State College Area $100,000. Public Financial Management Inc., a financial adviser for the swap, owes the district $60,000.

The swap dates back to 2006, when the school board approved a contract with Royal Bank of Canada as a way to finance the high school renovation project that ended up being shelved in 2007.

The goal was to lock in a low interest rate on $58 million in debt.

But the board never borrowed the money, and the district was bound by the original 2006 contract and an amended agreement in 2007, which pushed back the start date of the swap to Dec. 1, 2010, and said the district would eventually need to borrow tens of millions for a high school project.

The district sued in August 2010, asking a federal judge to void out the agreement. The bank argued the deal was valid.

In May 2011, the board did not make the first payment due to the bank of $978,285. The bank sued to recover a $10.3 million termination fee.