Sunday, November 2, 2008

Yes, even school districts got suckered

Check this out (h/t Jonathan Schwarz of A Tiny Revolution):

On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan.

It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits.

“Every three months you’re going to get a payment,” he promised, according to a tape of the meeting. But would it be risky? “There would need to be 15 Enrons” for the district to lose money, he said.

The board and four other nearby districts ultimately invested $200 million in the deal, most of it borrowed from an Irish bank. Without realizing it, the schools were imitating hedge funds.

[snip]

During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays.

But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally.

The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs.
The whole thing should be read. Whatever issues I've ever had with my locality's school board, at least getting caught up in something like the above is one of them. There's plenty to be said for playing it cautious when it comes to investing taxpayer money. I agree with Schwarz that this is one of those WTF moments:
When did America become this kind of country? Where little midwestern school boards think it's a fine idea to use their money allocated for scissors, paste and teacher pensions for speculating in the international bond insurance market? And where all the most prestigious colleges send a third of their graduating classes to Wall Street so they can learn how to fleece these little school boards most effectively?
I can't help but think that there is something fundamentally wrong with the way our society is structured and in terms of its priorities. My guess is that school boards would become vulnerable to such scams because their schools have been put on the back burner and they get desperate to find a way out of making some terrible decisions that end up adversely affecting the very people whom they are supposed to serve: the kids. The lure of the easy buck was just too tempting under the circumstances, and once the scheme fell apart, the circumstances became even more dire for the ones who fell for it (and more importantly for those who rely on such necessary services as public education and public transit).

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