With only a few days before the Colorado primaries, the New York Times dropped what is being called a "bombshell" into the Democratic Senate race.
An article by former Pulitzer Prize-winning writer Gretchen Morgenson painted a decidedly negative picture of a 2008 financial deal--pushed by then-Denver Public Schools chief Michael Bennet--aimed at closing a $400 million gap in the DPS pension fund.
From the Times:
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.
The Denver school board unanimously approved the JPMorgan deal and it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed. In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.
The article went on to claim that the deal forced DPS to pay over $25 million in extra fees to various financial institutions, and will cost many millions more to unwind. One independent financial advisor, Andrew Kalotay, openly questioned the wisdom of the deal to the Times: "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?"
The article comes as Bennet, now a Senator facing a primary challenge from challenger Andrew Romanoff, is fending off attacks over his ties to big business. Last week, Romanoff released a series of ads attacking Bennet for a deal he made to restructure a cinema chain while working in the private sector.
Bennet and current DPS Superintendent Tom Boasberg, who was DPS's Chief Operating Officer when the deal was signed, have defended the deal on Friday.
"Today, DPS is one of the few districts in the county actually hiring teachers, instead of laying them off," Bennet told KDVR on Friday. "Because of the decisions we made, we have provided a long-term, stable pension system for our teachers. And even more important, DPS has invested almost $20 million more into our classrooms as a result of the decisions we made."
Romanoff, meanwhile has attacked Bennet for the deal, telling radio host David Sirota "it strikes me that cutting deals with Wall Street is not, in this case, in the best interest of our citizens."
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