Canon-Mac officials wants district to take new tack on risky debt structure

CANONSBURG - Canon-McMillan School District is considering whether to get independent financial advice to unwind itself from risky transactions.

Earlier this decade, the district sold bonds and then did a "swap agreement." Because the interest rate on the bonds was higher than what the district wanted, Canon-McMillan entered into the swap agreement with a variable rate, said Joni Mansmann, Canon-McMillan director of business and finance. The idea was that the variable rates would be lower than the fixed rate.

She discussed the issue at Monday night's school board meeting and answered more questions Tuesday.

The district also piggybacked two more swaps on top of the original swaps, said Mansmann, adding that the agreements were approved before she was hired at the district. As a part of those agreements, Canon-McMillan received roughly $5 million up front.

The problem is that the two original swaps are significantly "underwater," meaning Canon-McMillan would have to pay additional money to get out of the agreement because the rates on the bonds are negative for the district, she said. How much extra money the district will have to pay will depend on when it ends the agreement, she said.

The district could get almost $500,000 by ending the swaps for the two piggybacked agreements, she said. Mansmann is recommending that the board get out of those two agreements and hire an independent financial firm to help determine how the district can get out of the remaining two agreements while losing as little money as possible.

"I don't think we will come out positive on all four," she said.

One of the underwater swaps comes due Dec. 1, 2010. If the board doesn't end the agreement by that day, it will have a variable rate until the end of the contract, she said. It can't be refinanced, she said.

The second underwater swap comes due Dec. 1, 2012, and also has to end by that date or face a variable rate until the end the contract without the possibility of refinancing.

She said she will likely recommend that the district end the agreements before those dates, even though she expects a loss. She said ending the agreements will take away the risky investment.

"Why have any risk on the table of taxpayers' money?" she said. "I'm trying to have a potentially bad situation have a better ending."

The board still has $3.1 million of the $5 million from the original swap agreements in its budget. The district set aside $200,000 more this year to help rebuild the original amount. If Canon-McMillan gets the $500,000 from ending the two piggybacked agreements, Mansmann said, she would like to set that aside as well in case it's needed to end the other two swaps.

The school board is expected to vote Monday on ending the piggybacked swap agreements and to hire the firm Boenning & Scattergood to give financial advice.

Board member Kathy Smith said the firm made a reasonable offer and was recommended by attorneys and neighboring schools.

"I'd be happy to hire someone to get that risk off the books," she said.

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