Bethlehem schools swap out more risky debt


The Bethlehem Area School Board continued to reshape the district's long-term finances by voting Monday to spend nearly $4 million to terminate part of a bond ''swap'' that turned toxic in last year's global banking freeze.

The board's 7-0 vote, with two absences, came on the last meeting for Superintendent Joseph Lewis, who took early retirement and will step down Friday. Lewis and his soon-to-retire business manager Stanley J. Majewski Jr. and their team of financial consultants advised the board to use variable-rate bonds and swaps between 2003 and 2007 to fund the renovation and rebuilding of schools.

Lewis said Monday he is proud of the facilities his administration built, even though the district has experienced financial difficulty in part as a result of the construction costs.

Swaps, which are layered on top of variable-rate bonds, are contracts with investment banks that bet on interest-rate changes. Swaps were used in an effort to lower borrowing costs because variable-rate bonds historically are lower than fixed-rate bonds.

But swaps carry high risk. With 75 percent of its total debt tied into the risk deals, the district was overexposed when the housing market crash led to the credit freeze in fall 2008. The freeze sent variable interest rates skyward because banks had stopped lending money to each other in what bankers call liquidity.

Monday's vote was needed because the district's liquidity provider, Dexia, a European bank, is getting out of the liquidity business next year. In May, the district spent $12.3 million to terminate a different swap and issued a new fixed-rate bond for the same reason.

The vote Monday involved a $55 million bond, which had two swaps with Morgan Stanley attached to it. The 2005 swap was working, but the district needs to end its relationship with Dexia by doing two separate transactions, said the district's new financial consultant, Scott Shearer of Public Financial Management in Harrisburg.

The first deal calls for the district to pay Morgan Stanley about $3.7 million to terminate part of one swap and issue a new, $25 million fixed-rate bond. The second calls for the district to issue a new, $29.8 million variable-rate bond while also transferring the remaining swaps to the Bethlehem Area School District Authority, a quasi-government agency the state allows to act as a more cost-effective way to borrow money.

Aside from the Morgan Stanley payment, the two deals could cost taxpayers an additional estimated $1.35 million in fees to consultants, banks and lawyers. Shearer said the district would close on the deals in November.

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