Debt is central to the choices made by both the people who run Peralta the institution and those who take its classes. Strangely, debt is rarely explicitly discussed, even after the explosion and resurrection of the big banks. Yet debt is a “kitchen table” issue for working class communities living off credit, strained to pay the mortgage or rent. From 2004 to 2008, the percentage of community college students who borrow rose from 30% to 38%. Almost half of applicants to California community colleges have “no resources to pay for college” and are “most likely to have ‘unmet need’ even after receiving all available aid.” We are too often broke and dependent, and so is our school.
Peralta likewise has obligations as an institution subject to the risk and turbulence of financial markets. Formed in 1965, the Peralta Federation of Teachers (PFT) – sole bargaining representative for over 1,000 full- and part-time faculty at the four Peralta colleges – traded cash raises for the promise of job security and benefits like pensions and fully-funded health care at the bargaining table after Proposition 13 dramatically defunded much of the public sector in 1978. As health care costs rose sharply throughout the 1990’s, the District conducted an actuarial study in 2001 which found a large unfunded liability to its faculty and staff to cover their health benefits after retirement. After negotiations with the PFT and other unions, the District made a deal: workers hired after July 1, 2004 would receive fully paid health benefits up to age 65 including coverage of eligible dependents, ending lifetime fully-paid health coverage. In return, the District would issue bonds to secure rising health costs for the coming decades. (An independent retiree group formed in 2004 after realizing that “none of the unions that represent active employees, represents retirees,” but they were too late.) In December 2005, the District issued $153 million in long-term Other Post-retirement Employment Benefit (OPEB) bonds, the vast majority of which would be repaid in variable interest rate payments every five years over a 45-year period. The idea was that the bonds would stabilize health benefit costs and the bond proceeds would be reinvested; assuming a 6% annual return, retiree health care would be securely vested.
This seemed like a clever move: in 2006, Peralta’s OPEB investment fund earned 10.86% while the District paid 6% to bondholders. Banks marketed these “auction rate securities” to clients as safe as cash with the same liquidity. CFO Tom Smith was cheered as “something of a celebrity in the world of public institution finance” and was invited to speak at a variety of conferences. In Nov. 2006, Smith also committed the District to six interest rate SWAPs, side-bets on the OPEB bonds where the District would pay a fixed rate of 4.9% and Morgan Stanley paid the District the one-month LIBOR rate (in Nov. 2006, one month LIBOR was 5.35%). As long as clients purchased the bonds and the economy grew, Peralta workers would have guaranteed benefits for life: the rising tide was lifting all boats. Organizationally, PFT had tethered itself to not just the interests of its members or education workers broadly, but to the fiscal management of the District as a whole.
In February 2008, the auction rate security market froze: corporations and rich people refused to buy the banks’ bonds. The rate that institutions like Peralta paid increased rapidly while their investment returns declined sharply. Peralta began paying off only its interest owed, not the principal. CFO Smith’s Finance Department stopped producing annual budgets for Board approval; over two years passed until the Trustees approved a budget or filed a quarterly financial report with the State.. When the markets froze, institutions paid a higher penalty rate, compounding the problem. When the first SWAP came due on Aug. 5, 2010, Peralta began making payments every five weeks to Morgan Stanley; the current one month LIBOR rate is .32%; Peralta bet, and lost, badly. The District now faces rapidly increasing OPEB debt payments: from 2016 to 2049, the annual debt service payment will grow from approximately $10 million to $21 million (roughly 17% of the annual budget as of July 19, 2010). Sadly, as of April 2010, Peralta’s total OPEB investment portfolio declined to $149 million, over $35 million short of the health care obligations the bonds were supposed to fund.
Sooner rather than later, the Trustees have a choice: either open up their post-retirement health care obligations and continue making drastic cuts or oppose the financial institutions that profit by ripping off public institutions and refuse to pay Morgan Stanley’s ludicrous monthly SWAPs. Likewise, the PFT will need to decide whether it will co-manage the District as it cuts its way into solvency or again act as a vehicle for struggle against austerity. In Argentina, Greece and Iceland, governments only defaulted or collapsed or conceded after repeated public sector general strikes, mass marches and rioting by an educated and angry working class and student movement that refused to pay for the crisis caused by a corrupt few. We encounter a similar problem.
State law requires community colleges to approve a final budget by Sept. 15 for the coming fiscal year. By April 2010, the Peralta Board hadn’t passed a budget for fiscal years 2008-09 or 2009-10. Its creditors took notice. On April 14, Standard and Poor’s Rating Services issued a negative outlook and downgraded Peralta’s general obligation and OPEB bond ratings “because of the potential for a rating change as a result of the fact that the district has not adopted a budget for fiscal year 2010.” Only “if the district adopts an operating budget for the current fiscal year, and takes necessary steps to adopt a budget for the next fiscal year” would the CreditWatch listing be removed. On April 27, the Board approved a 2009-2010 budget. On July 29, S&P reiterated its negative outlook in another memo. “We believe the district will likely need to continue to reduce its spending going forward to maintain balanced operations. Additional ratings actions may be possible if the district’s reserves fall below what we consider to be adequate levels,” wrote S&P credit analyst Li Yang. The memo (below) continues:
The district has until Sept. 15, 2010, to adopt a fiscal 2011 budget and management has indicated they intend to meet that deadline. Several spending cuts have already been approved by the board for fiscal 2011, which include further staffing cuts, and we understand the district intends to maintain reserves at between $6 million to $7 million for fiscal 2011.
Here we find Peralta stuck in the same predicament as postcolonial nations that have accepted loans from international financial institutions. There are, of course, strings attached: structural adjustment policies, meaning balanced budgets through severe austerity cuts and steep user fees. If these cuts aren’t implemented, Peralta’s credit rating will be downgraded again and it will be mired deeper into debt. It’s blackmail.
Peralta’s corrupt administration and Trustees have attempted to spin their way out of this memo. On Aug. 26, Trustee Linda Handy wrote that “Citing improved financial accounting systems, the District’s bond rating was recently upgraded to a level considered strong by a leading crediting-rating agency.” This is putting it kindly: in fact, the memo reiterates S&P’s negative outlook for Peralta bonds due to the District corruption and Trustee negligence that caused Peralta’s accreditation to be placed on probationary status. S&P’s Yang:
“The negative outlook reflects our view of the district’s probationary
accreditation status and the risk that it may lose accreditation. Should the
district lose accreditation, we believe its financial position may be weakened due to a potential loss in enrollment levels.”
Finally, the material basis of Peralta: accreditation not as a bare measure of competence, but as an institution’s ability to funnel public dollars to its creditors.
Peralta Community College District, CA’s GO, POB Bond Ratings Removed From CreditWatch Neg, Negative Outlook Assigned
Publication date: 29-Jul-2010 19:25:13 EST
View Analyst Contact InformationSAN FRANCISCO (Standard & Poor’s) July 29, 2010– Standard & Poor’s Ratings Services removed its ‘AA-‘ and ‘A+’ ratings on Peralta Community College District, Calif.’s, general obligation (GO) bonds and pension obligation bonds from CreditWatch with negative implications. The outlook is negative. In
addition, Standard & Poor’s affirmed its ‘AA-‘ rating on the district’s GO
bonds and ‘A+’ rating on the district’s pension obligation bonds.
“The CreditWatch removal reflects our view of the district’s formal adoption
of a 2009-2010 budget and its reduction of both certificated and staffing
levels due to state funding cuts,” said Standard & Poor’s credit analyst Li
Yang. “The negative outlook reflects our view of the district’s probationary
accreditation status and the risk that it may lose accreditation. Should the
district lose accreditation, we believe its financial position may be weakened
due to a potential loss in enrollment levels.”
“We believe the district will likely need to continue to reduce its spending
going forward to maintain balanced operations. Additional ratings actions may
be possible if the district’s reserves fall below what we consider to be
adequate levels,” Mr. Yang said.
The district has until Sept. 15, 2010, to adopt a fiscal 2011 budget and
management has indicated they intend to meet that deadline. Several spending
cuts have already been approved by the board for fiscal 2011, which include
further staffing cuts, and we understand the district intends to maintain
reserves at between $6 million to $7 million for fiscal 2011.
The CreditWatch placement, which was assigned on April 14, 2010, was based on our view of the district’s: lack of an adopted 2009-2010 budget, problems with its financial reporting software, and turnover among key finance personnel.
Additionally, the district had not yet finalized its fiscal 2009 audit report.
Consequently, we believe the district’s financial status and its ability to
meet future appropriation-related debt in absence of a formally adopted budget
came into question.
We understand the district intends to meet with the Accrediting Commission for
Community and Junior Colleges on Oct. 15, 2010, to show that it has made
progress in addressing its concerns.