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Hamburg Area School District's Response to the Auditor General's Audit Findings

Hamburg Area School District's Response to the Auditor General's Audit Findings

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Published by Reading_Eagle
The school district responds to the Pennsylvania Auditor General's report on the district losing $4.5 million in an interest rate swap.
The school district responds to the Pennsylvania Auditor General's report on the district losing $4.5 million in an interest rate swap.

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Published by: Reading_Eagle on Aug 30, 2014
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08/30/2014

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Hamburg Area School District
 
Press Release
 
TO:
 
69 News, The Reading Eagle and The Hamburg Item
 
FROM:
 
Mr. Steven Keifer, Superintendent
 
For Immediate Release
 
Hamburg Area School District’s Response to the Attorney General’s Audit Findings Regarding Interest Rate Swap Agreement
 
The Auditor General of the Commonwealth of Pennsylvania’s recently released audit of the Hamburg Area School District contains a “finding” that Hamburg Area School District “lost approximately $4.4Million” on an interest rate swap. In press discussions that followed the release of the report, the Auditor General stated "Every possible dollar needs to get into the classroom. Four million dollars could have gone towards improving education in the Hamburg area without placing an additional burden on taxpayers." The District would like to make clear that the methodology and conclusions of the Auditor General’s report are deeply flawed. The report calculates that the District lost $2.05Million while the swap was in effect and lost an additional $2.386Million when the District chose to terminate the swap. The Auditor General calculated the $2.05Million loss by comparing the difference the District paid on the fixed rate portion of the swap with the variable rate portion the District received from the initiation of the swap in 2005 through its termination in 2011. The District is unaware of any known financial accounting standard under which this constitutes a loss. The $2.05Million represented the Districts’ cost of interest on the debt to which the swap related under the Local Governmental Debt Act. This is how the District reported that cost in its financial statements as reviewed by its independent Certified Public Accountants and the Commonwealth’s Department of Education, neither of whom treated the expenditure as a loss. The Attorney General’s conclusion is akin to a homeowner selecting to finance their home at a fixed rate for 25 years instead of using a more risky variable rate loan and then having the Auditor General looking back after six years and saying the homeowner had lost money.
 
In order to undertake the building of the Perry Elementary project, the District determined in 2011 it was in its’ best financial interest to terminate the swap and pay the associated $2.386Million termination payment, as required by the Local Governmental Unit Debt Act, when it refinanced the original debt as part of a consolidated borrowing that included $18.62Million for the Perry project. The District’s debt service following this borrowing was actually reduced by $200,000 from the existing budgeted amount. The idea that $4.4Million did not get into the classroom or caused the District to raise taxes is simply not accurate. The District’s financial health from 2005 to present is strong. During the period the
 
Auditor General is claiming the District “lost” $4.4Million, the District’s fund balance increased despite rising costs across the board. The District was able to accomplish this with tax increases of 1% or less per year, an amount well below each relevant Commonwealth Act1 index limiting tax increases. Further, Hamburg Area School District is in the bottom 1/2 of all Berks County school district tax rates.
 
Immediately prior to the Auditor General’s June report , the District received a credit rating upgrade of A+ to AA-from Standard and Poor's, one of the two largest worldwide credit rating organizations. In the report, Standard and Poor’s cites “Solid financial operations, resulting in what we view as very strong finances” and “what we consider solid with strengthening reserves supported by consecutive operating surpluses”. They also recognize “Officials have not had to use layoffs or furloughs to maintain structural balance.” These results fly in the face of any idea that the District somehow “lost” $4.4Million in the same time period.
2005 Decision to Enter into Swap Agreement
The District’s decision to enter into the swap agreement in 2005 was well thought out and supported
by due consideration. The District was undertaking a $25Million building project for the Tilden Elementary School with a twenty year repayment period and wanted a fixed interest rate obligation in order to budget with certainty for debt service. The District considered using fixed rate bonds or achieving a synthetic fixed rate using variable rate debt with a swap agreement. As required by the Local Governmental Unit Debt Act, the Board retained the services of an independent swap advisor who met multiple times with the Board and administration over a six month period to review both the benefits of the swap and the related risks. In the swap advisors report, the
rationale for entering into the swap is clearly enumerated: “As a result of the current interest rate
environment, the synthetic fixed rate that will be established on the 2005 Swap is expected to be (1) extremely low based upon historical averages, (2) below the fixed rate the School District would be
able to achieve through a traditional fixed rate bond issue…”
 The 20 year swap rate of less than 4% was lower than the rate which could have been achieved using fixed rate bonds.
2011 Decision to Terminate the Swap Agreement
As stated previously, the District chose to terminate the swap agreement in 2011 as part of a consolidated borrowing which provided for the refunding of the remaining balance of the 2005 Bonds, payment of the swap termination and $18.62Million for the construction of the Perry Elementary
School. The Perry project was the last new construction on the District’s master plan and had been
considered for several years prior to 2011. Beginning in January of 2010, the Board received presentations during their regular public meetings
from the District’s underwriter and financial advisor of the various options available to finance the
Perry project. There were six presentations made from January 2010 through March of 2011 when the final decision was made. The Board considered three possible options for financing the Perry project: (1) Leave 2005 Bonds and swap agreement in place and issue level debt; (2) Leave 2005 Bonds and

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