Parkland Scolded for $47M Interest Rate Swaps Deal

The Parkland School District was scolded in an audit report by the state's Department of Auditor General for entering into an interest rate swap related to its 2004 issuance of $47,660,000 worth of bonds.

An interest rate swap allows a bond issuer, in this case the Parkland School District, to enter into a contract with an investment bank and speculate on which way interest rates will move.

The party that guesses correctly concerning which way interest rates ultimately move receives what's called a swap interest payment. The amount of the payment, according to the audit, is determined by several factors, including the the amount of debt (bonds) involved and the overall movement of interest rates.

"In reality, however, swaps are complicated, risky financial instruments that can needlessly waste taxpayer funds if the District bets incorrectly on which way interest rates will move," the auditor's report said.

The audit pointed out that, in 2009, the Bethlehem School District's use of two of its 13 interest rate swaps cost taxpayers $10.2 million more than if it had issued fixed-rate debt and $15 million more than if it paid simple interest on its variable-rate note without using swaps.

Following that, the auditor general recommended all state school districts stop utiizing swaps.

The audit further recommended the school district should avoid entering into any new swap agreements in the future and "terminate its swap agreement as soon as fiscally responsible to do so and refinance, if necessary, with conventional fixed-rate bonds.

Parkland responded that it has been avoiding swaps since the problems of the Bethlehem Area School District and other districts came to light four years ago.

"The District does not have any current or near future plans for a swap transaction," the reply said.

The current $47 million swap transaction has been working in favor of the district, the reply added. However, the district said it has instructed its financial adviser to terminate the transaction as soon as the interest rate market deems it financially feasible.

The audit report covered March 17, 2009 through April 20, 2012.

Overall, the audit found the district in compliance with state laws, contracts, grant requirements and administrative procedures.

The swap matter was listed as an observation in the report, along with a severance package given to its former superintendent.