The SRC’s Accountability Double Standard

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By Jack Grauer. Reposted from jackgrauer.com

“A-ccount-a-bility.” This is the politician’s mating call. The word echoes from podium to podium on crisp June mornings, too noble-sounding to question and yet forever immeasurable.

John Street in 2002 prescribed the state takeover of Philly’s schools as a “strong dose of accountability.” Lawmakers that now want to re-localize district control condemn the School Reform Commission (SRC), which currently runs Philly’s district mostly on the state’s behalf, as a “failure with no accountability.”

The SRC has its own accountability ideas. For them, it’s something aimed at teachers and students, not financial managers.

That’s odd, given that the regime reared itself on the audit-as-bible education reform ticket. Temple law scholar Susan Dejarnatt calls it “conservative modernization.” You’ve heard the language: “Inefficiency makes schools and teachers fail. We fix that by making them compete for funds. We use improved data-gathering to root out losers. Only winners eat.” So on.

Another, less-discussed aspect of the SRC’s conservative modernization platform is that it thinks of public funds as private investments. SRC champion and former state governor Tom Ridge in 2000 put out the Debt Management Handbook, which makes the municipal-debt-as-household-budget its central poetic conceit.

The Handbook details legal tweaks that enable municipalities and their related arms like Philly’s school district to take on more debt. It also very Protestantly warns local governments not to get all crazy with their investments, “like a household that overextends its use of credit… Just like a personal credit rating, the credit rating of your municipality should be guarded with care,” it suggests.

The rest is spreadsheet-history.

A 1999 Philly school district financial report shows they spent 6.2% of their budget paying down debt that year. That was before the SRC takeover. The SRC was by 2014 devoting 12% of their budget to debt service. Reporting a balance of $2.89 billion as of this month, the district will soon exceed the legal limit for what it can borrow without clearance by public vote.

Around 2005, the SRC swapped interest rates on 10 bonds with Wells Fargo, Morgan Stanley, Citigroup and Goldman Sachs. Without getting too Vox.com about it, the district traded in the low risk their own federally backed investments afforded them for more dangerous deals that could potentially earn them more money.

Here’s how the deals worked: if a thing called the London Interbank Offered Rate (LIBOR) went up, the district would profit. The banks would lose money. The opposite would happen if LIBOR’s rate dropped.

Knowingly or not, the district effectively bet against against the investments banks that made the 2008 financial crisis happen that it wouldn’t happen. But the crisis did happen. And LIBOR tanked. And so the district had to pay $63 million to the banks that made the crisis happen, according to the Pennsylvania Budget and Policy Center.

LIBOR rates chart. Source: Standard & Poor’s Capital IQ NetAdvantage.

A good part of the district’s loss resulted from fees they incurred when they cancelled these deals early in an attempt to minimize their losses. The district paid to insure “periodic scheduled payments,” according to a 2005 disclosure they filed with the Municipal Securities Rulemaking Board. But the district didn’t insure termination payments.

Two swap agreements valued at about $9.3 million remained on the district’s books as of October, 2016.

Phoenix Capital Partners was a financial advisor for Philly’s district when it made these deals. The district signed Phoenix after firing Investment Management Advisory Group (IMAGE) the prior year.

The FBI in 2006 raided the office of IMAGE principal David J. Eckhart. The federal government named him and a bunch of other municipal financial advisers that organized similar deals across the country in a class action lawsuit. Eckhart settled out. Operating now as NW Financial Group, he has since continued to co-advise bond deals along with Phoenix for the Pennsylvania Turnpike Commission.

The question of whether it should be legal for local governments to risk public money in deals like those described above isn’t new. In the late ’90s, visionary broker John Gardner Black lost $71 million in municipal and school district funds in locales all over Pennsylvania on such deals. He embezzled another $2 million.

The Pennsylvania legislature in 1999 honored Black with a bipartisan “Task Force on the John Gardner Black Scandal.” David Eckhart participated. The Task Force proposed stricter laws regarding the risks local governments can take with public money. The proposal never went anywhere in the legislature. But it still floats around online today like some abandoned reformist ghost ship.

Phoenix still provides Philly’s school district financial advice today. Professional services contracts show the district paid the firm more than $320,000 last year and recently signed them for a new contract set to expire in 2017.

Bits and pieces of this stuff make it into the media, but rarely in context. Like, the SRC lost $63 million in tax money on those swaps back in 2010. Remember the district’s 2012 “doomsday” budget, when they claimed they needed to shutter and sell all those schools to cover a funding gap?

Transfer deeds show the district has offloaded real estate valuable at about $66 million since doomsday. So in a sense, the plan worked. You could stop there. But Philly’s Office of Property Assessment values the land and buildings the district sold since doomsday at around $222.9 million.

What’s the conservative modernizers’ alibi on the nights those real estate deals closed on such bad terms? Out flogging some teacher with the accountability paddle? More to the point, what happened to that extra $156 million? These old buildings have surely depreciated in value somewhat since last appraised. But $156 million is a lot of money.

The SRC recently rated its own Philly district superintendent William Hite as a “distinguished” financial manager.

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