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Citigroup to Palm Beach County School District: Pony Up!

Fire Ant -- an invasive species, tinged bright red, with an annoying, sometimes fatal bite -- covers Palm Beach County. Soon, his column will appear twice a week on The Pulp. Got feedback or a tip? Contact [email protected].

Would the fine folks at an institution like Citigroup steal the pennies off a dead man's eyes? Would they stonewall the Palm Beach County School District, thereby taking millions of dollars annually away from public education? We wouldn't say that. Not yet.

But according to economists at the Florida Public Services Union, Citigroup is reaping windfall profits from a deal with the District, a deal that originally made sense but changed with changing circumstances. The union --an affiliate of the Service Employees International Union -- has urged the District to renegotiate the deal. But the District has hemmed and hawed and Citigroup has kept its cards face down. If things don't change, Fire Ant may have to revise his judgment about the bank. Here's the deal:

Back in the early 2000s the School District issued bonds to pay for school construction. (Reader: Don't let those eyes glaze over.) They agreed to pay the bondholders a variable rate of interest, that is, one that varies with the rise and fall of interest rates in general.

To protect against a spike in rates, the District cut deals called "interest rate swaps" with Citigroup and another bank, UBS. These deals are complicated, but essentially they let the District trade a variable interest rate (which is volatile and uncertain) for a fixed interest rate (which is secure and predictable). At the time the deals were cut, the variable rate was low but was expected to go up. The idea was that the bank would make a little bit of money and the District get rid of its risk--a win-win. Champagne all around.

Since then, however, the economy has nosedived (thanks largely to the Wall Street gang), and with it the general rate of interest. The banks ended up having to pay the District only a low, low interest rate (below one percent) while the District is on the hook to the banks for a much higher, four percent rate.; According to the unions, the vig is costing the District more than $16 million a year, and will add up to almost $244 million if the deals run to maturity. That's a lot of schoolbooks.

The unions have brought their analysis to the District's Finance Advisory Committee and proposed that the District ask the banks to renegotiate the deals -- which other government bodies in similar fixes have done. The committee says - -for a variety of reasons that don't include a substantive rebuttal of the SEIU's numbers -- they don't think it's a good idea.

That's an advisory committee, however. The Palm Beach County School Board has also heard the union's take on the deals, and it's the Board that calls the shots. Sources say there is movement behind the scenes, and District Treasurer Leanne Evans says the District is "always looking for ways to reduce capital costs."

At the same time, Evans told Fire Ant, "To ask the bank for a below-market rate is difficult." She says the District has no leverage--unlike those municipalities that have successfully negotiated better deals. "We have a budget problem but not close to others, close to bankruptcy. They're about to close their doors. They're negotiating rates that are crazy for a few years."

In any case, Evans added, the union's hoped-for better rate is unrealistic. The District needs deals that run 20 and 30 years, she said, and current long-term rates are more or less identical to the rates the District pays the banks under the existing deals.

Which raises the question: What about the variable rate, the one Citigroup and UBS pay the District and from which they profit so greatly? Who set that rate so low currently?

One who did is the Federal Reserve, where Citigroup and its kin borrow money at less than one percent--a rate the Fed set to bail out the banks after the banks helped crash the credit market.

Another is the bankers behind LIBOR (London Interbank Offered Rate), the rate banks charge each other for short term loans. That's now as low as less than one half of one percent--and that rate, the headlines now blare, resulted from collusion and lying by the big banks, Citigroup and UBS included.

FPSU President Alphonso Mayfield is of the opinion that, in light of the banks' unethical and/or illegal behavior, and the public's sacrifices on the banks' behalf, "It now makes sense to renegotiate the deals--from a moral standpoint. It's a chance to provide more for the students." As for the banks: "If they end up making eight hundred percent instead of one thousand percent, it's not a bad deal."

SEIU economists point out that the District is not totally without muscle. They say the District could refuse to do any further business with Citigroup, joining with other toxic swaps victims in a boycott. They also point to the potential for civil litigation and criminal charges over LIBOR and other bid-rigging scandals.

But maybe it won't come to that. Maybe the bailed-out banks will show some humanity and bail out the District and its 170,000 school kids. Corporations--including Citigroup, which declined to comment for this story--are people too, right?

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