Certificates of Prevarication – Part II

Yesterday, I wrote about the Jefferson County School District’s use of Certificates of Participation to get around the State Constitution’s requirement for a public vote before issuing general obligation debt.  I had forgotten that once upon a time, Denver Public Schools did almost exactly the same thing.

The scheme – used widely around the state, and even by the state, is for the district to set up a corporation and then lease its own property back from the corporation, with the lease payments matching bond payment due on debt floated by the corporation in the public debt markets.  The debt isn’t exactly unsecured – the school buildings themselves serve as collateral.  But there’s no separate revenue stream dedicated to the lease payments, which come instead out of general fund revenue, the very definition of general obligation indebtedness that the constitution seeks to limit.

In 2008, Denver Schools issued$750 million worth of both fixed- and floating-rate COPs, in order to recapitalize its own pension program, which had a $400 million funding gap.  This was necessary for PERA to agree to absorb the DPS retirement system.  While the ins and outs of the deal are beyond the scope of this post, suffice it to say that by 2010 the deal had become a key element in the Democratic US Senate primary between Andrew Romanoff and Michael Bennet, who had been Denver Schools Superintendent at the time of the COPs.

Our concern here isn’t whether or the the deal was well-structured on its own terms.  It may well have been, and has, at any rate, since been refinanced on terms more favorable to the District.  The point here is that Denver Public Schools, in order to facilitate turning over the unfunded portion of its own pension plan to the rest of the state, issued what is general obligation debt in all but name in order to cover a shortfall.  That debt, issued without public approval, now accounts for 37.6%, or 3/8, of the school district’s entire long-term debt.

In the meantime, the burden of DPS’s unfunded pension liability has been neatly shifted onto the rest of the state.  DPS may be required to step in with additional payments if an actuarial analysis shows that, in 30 years, the plan will be less sound than the rest of PERA.   As of the 2011 CAFR, the plan’s fundedness had fallen from 88% to 81%, still the least-unhealthy PERA division by far.  And the process of renegotiating what is likely to be, as with most public pensions, an unsustainable burden on the taxpayers, got much more complex with the addition of the state and PERA as explicit parties to the contract.

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