Thursday, June 19, 2008

How much is that investment in the window?

The Milwaukee Journal Sentinel has followed up on its reporting on the Waukesha School District’s borrow-to-invest scheme. They deserve credit for not letting this matter drop. The latest article points out the district owes more in interest payments on the debt in the last three months than it has earned from the investment by about $75,000, or enough to add a rookie teacher to the school district’s roster.

Executive Director for Business Services Erik Kass, not yet departed for Madison,

“…said he did not feel comfortable predicting gains or losses for the current quarter until after it has ended. He pointed out that earnings for the first three quarters of the fiscal year exceeded what the district has paid in interest by about $57,000.

The returns for the next fiscal year might not be as positive if the value of the district’s investment remains low, he said.

“This year, we’ll be OK,” Kass said. But next year, “that could become an issue if the rates don’t bounce back for the investment.”

(Kass’ role in the story should not be understated. After all, he was dispatched to Florida by the investment company that put this borrow-to-invest plan together to use the name of the Waukesha School District to help sell it to other school districts.)

The problem, of course, is in the long term. If the investment scheme does not pay off sufficiently to cover the debts incurred by the plan, then this gamble with the taxpayers’ money will have double the harmful effect. Not only will taxpayers have to cover the loss (as well as cover shortfalls along the way), they will still be on the hook for the unfunded pension spending this scheme was supposed to fund.

The Waukesha Taxpayers League weighs in on the issue:

In May, the value of the trust fund was still at $38 Million instead of the $50 Million real dollars borrowed. READ this as a $12 Million loss until or if it ever recoups to its face value. If the school board must borrow money to shore this up, it will be a total loss to taxpayers--who by the way, are on the hook for any money lost from this scheme and the early retirement benefits we still have to pay. As taxpayers, we hate paying twice for cushy benefits. And has any one really questioned why administration is jumping ship and the board just sits there and says,'don't worry about it, it will be just fine.'? If this were a private business, heads would be rolling--right up to and including the board.

The blog Fox Head also weighs in:

I certainly applaud the district for trying to find ways to fund the retirement benefits and keep costs of doing so under control. In doing so, I believe they took on more than they could handle. Borrowing in order to invest is a very risky proposition; this is why this sort of activity is very heavily regulated. The district in its attempts to increase its return, which is very admirable, took on way too much risk. Even worse is I believe they did not understand the risks they were taking and it came back to bite them.

The effects of this may not appear now, they may not appear tomorrow, but eventually the losses will come out and it will cost money to fix this issue. This is something the district needs to carefully consider before trying something like this again.

So far, not one of the members of the school board is questioning this investment scheme publicly. Not the outspoken Kurt O'Bryan, not the President Dan Warren, nobody. In whatever suicide pact they've formed, they've decided upon a course of collective responsibility.

So be it.

I'm loathe to make any policy dispute a matter for recall, or even prosecution. But it is my hope that as the school district makes real progress in bringing its finances under control (and I have high hopes for the new superintendent Todd Gray) the public will be less intimidated by the challenges facing the district. After all, it's hard to recruit officers for a ship when the current crew keeps yelling, "It's sinking!" A new optimism may be just what is needed to encourage more members of the public to consider running for school board. Because the current membership certainly needs challenging.