Auditor General DePasquale Says Financing Swap Cost Hamburg Area School District More Than $4 Million

August 26 2014

Auditor General DePasquale Says Financing Swap Cost Hamburg Area School District More Than $4 Million

Click for Hamburg Area School District audit report

READING (Aug. 26, 2014) – Auditor General Eugene DePasquale today said a risky financial agreement in the Hamburg Area School District in Berks County cost taxpayers nearly $4.5 million in losses and termination fees.

The Hamburg Area School District was hit with $2.38 million in termination fees to end a financial management “swap” after losing a net $2.05 million on the investment over six years, according to a recent audit.

“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,” DePasquale said.

In March 2011, the district incurred a $2.38 million termination fee to end an agreement which swapped a variable interest rate for a fixed interest rate on a $25 million general obligation bond. The district yielded a $2.05 million net loss on the swap, which was entered May 2005.

Swaps are complicated financial contracts between school districts and investment banks and rely on unpredictable and, often risky, factors.

In its response to the observation which is included in the audit report, Hamburg Area school officials say they wanted predictable costs and better budgeting with a fixed interest rate on the bond issue, rather than a variable one.  Auditors counter that swap cost the district $4.43 million.

“Sometimes these swap deals pay off. Most times they are unpredictable. In this case, taxpayers were left with hefty termination fees and a net loss over six years,” DePasquale said.

Hamburg is the latest example of swap agreement that cost taxpayers money.

Two audits completed in 2013 found the Oley Valley School District in Berks County and the Scranton City School District in Lackawanna County, each lost $6.5 million in swap financing agreements.

The audit also found that the Hamburg Area School District erroneously reported $17,356 in payouts of unused vacation and personal leave for three administrators as retirement wages to the Public School Employees’ Retirement System. School officials agreed with the finding of over-reporting the wages to PSERS.

In the 2011-12 school year, the Hamburg Area School District provided basic education to 2,375 students and employed 186 teachers, 136 full- and part-time support personnel and 16 administrators. The district received $11.7 million in state funding in the 2011-12 school year.

The Department of the Auditor General examines the records of school districts, charter schools, intermediate units, and area vocational-technical schools. The audits — among other things — assess whether or not school entities received the state subsidies and reimbursements to which they were entitled, accurately managed taxpayer funds, and complied with ethics codes. The audits also determine whether or not teachers and administrators were properly certified for the positions they held during the audit period.

A copy of the Hamburg Area School District audit report is available online at: http://www.PaAuditor.gov/Media/Default/Reports/sch69271HamburgAreaSchoolDistrict062414.pdf.

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