Chris Romer and the $1 Billion Retirement Question

This is a story about teachers, their retirement, and the system supporting that retirement. It is a story about how the future of teachers' ability to retire could be impacted by the actions of a group of individuals, but by one individual in particular. In fact, these actions could jeopardize Colorado's entire state employee retirement system, Colorado PERA.

The Denver Public Schools teachers' retirement system is expected to be bankrupt in as soon as 20 years, or 2030. This expectation is based on Denver Public Schools' current employer contribution rate to PERA. DPS is expected to contribute 1.8% of its payroll to the teachers' retirement program in 2010. That's about $8.8 million if DPS' payroll is $492 million in 2010. In 2011, DPS is expected to contribute 3.1% of its anticipated $514 million payroll. That's about $16 million. The rest of the state's school districts? Well, they are contributing about 16.5% of their payrolls.

I want to state very clearly here, DPS is funding its pension exactly as it is required to under Colorado law. That law was established by Senate Bill 09-282, which was signed by Governor Ritter in 2009. SB 09-282 governs the merger between DPS' retirement system and PERA. According to the law, DPS is allowed to deduct from its employer contribution a percentage of the debt owed on the 1997 and 2008 Pension Certificates of Participation, or PCOPs. The amount of this deduction is $72 million in 2010 and $73 million in 2011.

How DPS' teachers got into this mess is a fascinating story of politics, relationships, and Wall Street graft. In the end, however, if DPS' retirement system goes under, we, the Colorado taxpayers, will get to foot the bill for fixing it -- that you can count on.

Let's start simple. Public pension plans cost a lot of money. These plans put a strain on almost every government organization's budget, not just our local budget here in Colorado or in Denver. The problem is, government entities have been underfunding their employee's pensions for years, which builds unfunded liability and, generally, the law requires that this funding be "caught up" so that retirees can collect their pensions at some time in the future.

Underfunding isn't necessarily the government's fault. As tax revenues get tighter, it becomes harder and harder to fund programs the community relies on. For the majority of the community, the civil employees' pension is not something it relies on, or necessarily cares about. What the community knows is, when the swimming pools are closed all summer, it wants the mayor's head on a platter.

So what's a mayor to do? Everyone knows the answer -- keep the pools open at all costs, even if it means taking from money used to fund the pension, another critical, legal requirement, but one that is not easily visible to the voters at large.

Really, only the government's employees pay any attention to the pension fund and, of those, most are near retirement. The majority of voters see government employees as spoiled, working cushy jobs with fat benefits. If you tell the average citizen the city's employees may not be able to retire at full pay at the age of 65, you'll get a shrug and a laugh, maybe even a statement like, "So? I won't be able to, either."

And so it goes, year after year. Mayors know they won't be around when the pension piper comes calling. The employee's pension is a long-term obligation for which individual mayors are not usually held accountable. After 4 to 8 years in office, the mayor moves on, maybe becoming a state representative, a consultant, or returning to business. Only the mayor's employees remain, administration after administration.

All of this is true at Denver Public Schools. The pension was underfunded, by $386 million at the end of 2009, according to the data from the last DPS retirement system (DPS-RS) actuarial analysis valuation, despite DPS giving the pension $400 million mid way through 2008. When the pension gets dangerously underfunded, usually at about the level it is now, the school board and the superintendent do something about it. Whatever this action is, it generally funds the pension back to 100%, but at a cost to the District.

Like when you and I take a mortgage, the District has to service its debt, in this case the cost of paying back the load used to fully fund the employees' pension. However, the District still has to continue to contribute to the pension despite this newly created liability, that is, until Colorado SB 09-282.

It's a fact of nature: pension costs always go up. The District adds new employees. Employees get raises. Employees retire. Along the way, employees contribute money to the pension, $39.3 million in 2010 based on DPS' numbers. The employer is supposed to contribute, too. DPS is contributing, but at a level significantly below what it needs to be if the pension is to be stable and able to pay out benefits over the long haul.

There is a mathematical expression governing pensions: cost = liability. This means pension contributions plus pension investment returns must equal the benefits to be paid to pensioners plus the expenses for running the pension system. When the left side of this equation (costs) drifts below the right side (liability), the system becomes unstable. Benefits due retirees relying on the pension are at risk. The greater this imbalance, the greater the risk to the pension's subscribers.

The teachers' pension system has been driving DPS superintendents crazy for a long time. Most DPS superintendents used a tool called pension certificates of participation, or PCOPs, to address the unfunded backlog associated with the pension. PCOPs are a tool for taking on debt that is not approved by the voters because the debt is secured, typically by real property. Using the PCOPs model, DPS sold schools like East High School, Skinner Middle School, the Cory Merrill campus, Manual High Schools, and several others to a shell corporation. After issuance of the PCOPs, DPS repays the debt by leasing back the buildings it sold. When the debt is repaid, the buildings return to DPS ownership. However, should the debt be defaulted on, DPS would lose access to these buildings, which would be sold by those who hold the debt.

In 2007, Michael Bennet began to explore how this model of financing pension-related debt could be changed. Bennet had been superintendent of DPS for almost 2 years in 2007. He spent his time telling anyone who'd listen that the DPS retirement system was killing the District's budget. It is harming students by impacting resources in the classroom, he'd say. Mr. Bennet claimed that DPS was contributing more to its retirement system than any other Colorado school district. He mentioned numbers like $650 per student -- that's the cost DPS was facing because of the teachers' pension fund. Bennet said it was unfair.
In his 2007 district reform plan, Bennet said his goal was to, "Stabilize the District's budget by financing its pension liabilities, fully funding its pension and selling surplus real estate." (See "Bennet Announces District's Reform Plan.")

To address this, Superintendent Bennet began to seriously investigate a means to reduce the District's obligations to the teacher's retirement fund. He commissioned studies by foundations. He addressed the issue with A Plus Denver. He talked with anyone who would listen, telling the story, asking for ideas.

Then Mr. Bennet formulated a simple plan: DPS would fully fund its pension by paying off the unfunded liability and then make as little payment to the retirement system as possible, regardless of the outcome. Better yet, Bennet thought he could use the pension plan to repay the debt incurred to fully fund it. This would remove the pension albatross from around his neck, freeing up money Bennet said could be spent in the classroom, and make him a political hero -- he would have fixed the third rail of school politics, the pension system.

So what does Bennet do? He returns home to the world he understood before going into public service. He went to Wall Street.

Early in 2007, Bennet approached financiers looking for advice on how to solve the problem. Whom should he find there but JP Morgan and the firm's lead of western public finance, Chris Romer. Romer is currently the State Senator from Colorado's District 34 and has a long history on Wall Street. Romer had been with JP Morgan since 2002, doing deals with a number of public agencies. One of Romer's many and varied biographies found on the web states that --

...he is a recognized expert in solving state and local budget problems and has developed programs to help fund schools, hospitals, college facilities, student loans. and affordable housing. Chris has helped finance more than $10 billion in municipal infrastructure projects, such as the Denver Public Schools, Denver International Airport... and RTD's FasTracks project.

Along with JP Morgan, and presumably Chris Romer, Bennet concocted the EPOST pension financing transaction. In short, this transaction would have allowed the DPS teachers' retirement system (DPS-RS) to borrow $375 million from JP Morgan, who would hold the money and invest it per DPS-RS' instructions. The DPS retirements system was underfunded by $375 million at the time.

This is where things get tricky, however. DPS-RS' annual return on investments was calculated by actuaries to be 8.5%. Each year, DPS was charged this amount on the unfunded liability because the retirement system was losing out on the returns on investment for the unfunded liability. Think of it this way: if I gave you $10 and you invested it in the DPS retirement system, you would expect an 8.5% return on investment, or $10.85 after one year. The next year would be the same. You'd expect to have $11.77, or an 8.5% return on your $10.85. This compound interest builds liability pretty quickly.

So here is how Michael Bennet proposed to structure the loan for DPS-RS. DPS-RS would have owed JP Morgan about $20.5 million each year, or 5.5% interest on the $375 million. DPS would then pay 3% interest on the unfunded liability. Then the scheme became simple: if DPS-RS' investments returned more than 8.5% (5.5% plus 3%), the retirement system would have made money each year. If not, it would have lost money to JP Morgan. Either way, JP Morgan would make $20.5 million a year, at a minimum.

Thoughtfully, the DPS-RS Board of Directors voted the proposal down. It was not willing to bear the market risk Bennet was attempting to transfer to the retirement system. One high-level former employee of DPS-RS told me recently, "If that transaction had occurred, JP Morgan would now own half of DPS' retirement fund." The statement is based on market conditions between 2008 and late 2009. DPS-RS had nowhere near an 8.5% return on investment in 2008. DPS-RS' return on its investments was approximately -25% because the market tanked as the housing bubble burst and Wall Street melted down.

This plan having failed, Bennet again returned to JP Morgan and its Wall Street buddies. Together, they concocted the 2008 PCOPs deal, with JP Morgan at the heart of it. As part of the transaction, JP Morgan would serve as an underwriter, an interest-rate swap counterparty, and a variety of other bit parts that generate fees. The PCOPs financing transaction would work the way I described above. DPS sold 15 school buildings and its two administrative buildings to a holding company and set up leases to pay back the debt. Of course, the holding company was nothing more than a DPS nonprofit entity called the DPS Facility Leasing Corporation, with direct control being exerted by Michael Bennet.

Using this model, DPS issued $750 million in debt, using $400 million to fully finance its pension fund and $350 million to refinance some of the pension-related debt it had issued previously. This previous debt had some big payments scheduled in the next 10 years. However, these payments would have paid off the $350 million debt by 2017.

As if this were not complex enough, JP Morgan and Bennet then went on to structured the deal around a very complex derivatives-based financial model called an interest rate swap as well as weekly auctions to sell DPS' bonds. The DPS school board, then lead by Theresa Pena, who is now Bennet's campaign treasurer, approved the transaction in April 2008. Within 1 year, DPS paid over $90 million in interest, transaction fees, and penalties to service the transaction. This year, DPS expects to pay approximately $40 million, all of it interest and fees, to a variety of parties, including JP Morgan. For next school year, DPS has budgeted $64 million to pay its debt.

(Readers should note that DPS disagrees with this assessment, instead saying that the District has saved $18 million to date. In fact, this savings is touted on Michael Bennet's U.S. Senate page: About Michael.)

To taxpayers, it is important to know one fact about all of this money: the money spent to date has not paid off one dime of the loan's $750 million principal. All $134 million has gone into the coffers of JP Morgan and other members of the financing team, and DPS plans to send another $64 million that way this coming school year. In fact, DPS will not begin paying off the $750 million principal until 2017, and then, very little of the principal amount until much later.

By DPS' own estimate, JP Morgan has made approximately $50 million on the transaction since April 2008, all on the back of the Denver tax payer. JP Morgan will continue to collect fees along the way, at least $20 million per year until 2038. For those without a calculator, that's $540 million.

Why would DPS do this? Well, the answer to this question hinges on the second part of Bennet's plan The District took the $750 million in debt in anticipation of a merger between DPS-RS and PERA. In truth, DPS' retirement system did not have to be fully funded to merge with PERA, but for the part of the plan to dramatically reduce payments to the pension system. This could only be sold effectively if DPS' pension were fully funded at the time of the merger.

And who better to sell this idea than Chris Romer?

You must understand, Chris Romer's name is not on SB 09-282 as a legislative sponsor. The SB 09-282 legislation was crafted during 2008, when Romer's life was under a microscope. (Much of the following four paragraphs are based on reporting by the Albuquerque Journal.)

In September 2008, Romer's name was included in a Grand Jury subpoena seeking any correspondence between Romer and then Governor of New Mexico, Bill Richardson. The subpoena was part of information gathering related to a pay-for-play scandal surrounding Richardson, and Romer had been around as the lead banker representing JP Morgan during some of Richardson's fiscal decisions at the time. Romer's involvement in the transaction, called GRIP, or Governor Richardson's Investment Program, was to recommend a new type of public financing option. He called the option an "interest rate swap."

Eventually, JP Morgan became the underwriter for $1 billion in New Mexico transportation bonds as well as a major counterparty in the financing scheme's interest-rate swaps. Other counterparties to the swaps portion of the transaction included Goldman Sachs, where Romer's brother was a vice president working in the public finance portion of Goldman's Los Angeles office.

At the heart of the investigation was a company called CDR Financial Products, a company brought to the deal by JP Morgan. CDR acted as an adviser to the New Mexico government on GRIP, specifically the interest-rate swap component of the transaction. CDR had contributed $100,000 to Richardson-affiliated political oranizations, and CDR was subsequently awarded $1.5 million in fees from the New Mexico Finance Authority.

JP Morgan also brought in Michael Stratton, owner of Denver-based Stratton & Associates, to help sell business in New Mexico in 2003. According to Bloomberg, "Stratton's firm gave $2,000 to Richardson's first gubernatorial bid in 2002." Stratton was an adviser to former Colorado Governor Roy Romer, Chris Romer's father.

In 2005 and 2006, while Richardson was president of the Democratic Governors Association, Stratton's firm was paid at least $160,000 for political consulting. Stratton also advised Richardson on his 2008 presidential campaign, where he worked as "a bundler." According to Bloomberg's report, "Bundling describes the activity of fundraisers who pool a large number of campaign contributions from political action committees (PACs) and individuals...." He, along with Chris Romer, and CDR's CEO, David Rubin, also made contributions to a political organization called Smart Government, Inc. The president of Smart Government, Inc. was Thomas Romer, Chris' brother.

If this smells suspicious to you, it did to the Grand Jury, too. As subpoenas for information rolled out, Chris Romer decided to cooperate fully in the investigation. Soon after that decision, Romer left JP Morgan to become president of KIPP's charter school operations in DPS. KIPP, or the Knowledge Is Power Program, operates charter schools nation-wide.

Freed from his responsibilities at JP Morgan and safely ensconced at KIPP, Chris Romer turned his attention back to legislative matters. Work on the PERA/DPS retirement system merger legislation began in earnest in November 2008 after a failed attempt to bring the two retirement systems together earlier that same year. This time, the legislation included covenants to ensure the merger happened.

All sides, DPS, DPS-RS, and PERA, had objectives surrounding the legislation, several of them conflicting. DPS, of course, did not want to contribute to any retirement system in the future, especially to a defined-benefit pension plan. DPS-RS badly wanted to get out from under the DPS school board's thumb. PERA was nervous about the whole thing, but saw the economies of scale that could be achieved if the merger happened successfully. Some of the key components of SB 09-282 were cooked up in this political stew.

  • DPS was allowed to deduct 8.5% of the outstanding PCOPs principal as its costs associated with servicing its PCOPs debt, or approximately $63.75 million. However, DPS would have to continue to pay for retiree's health regardless of the contribution rate.
  • The legislation increased DPS' rate of contribution 3.6% above other school districts in the system.
  • Most controversially, the legislation includes a "5-year true up" of the system, which could result in increased employer contribution rates for DPS.

It is unclear what role Chris Romer may have had in crafting any of these three components. If he had any, it would be an enormous conflict of interest with his former employer scheduled to make hundreds of millions off the DPS deal, but particularly during the period between September 2008 and February 2009.

Nonetheless, the first component of the legislation, DPS' deduction associated its PCOPs, made its way into the bill, a component some say the state legislature did not understand at the time. The reason for this is simple: that the basis of the deduction, $750 million, was not revealed to the legislature. Thus, DPS' 8.5% deduction versus the ~14% contribution rate did not sound so bad. However, when the basis is included, it becomes apparent that 8.5% of $750 million is a significant portion of 14% of DPS' covered salary, at that time just short of $400 million.

This 8.5% deduction means one thing to DPS: the deduction from payments to the retirement system would be used to service the District's $750 million pension-related debt. Another way to say this is, DPS would use the employees' retirement system to pay back its 2008 debt, thereby meeting all of Mr. Bennet's goals for the transaction.

The last component of the list, the 5-year true up, is somewhat complex but is critical to understanding the issue facing DPS and, thus, the taxpayer.

At the time of SB 09-282, PERA was concerned that, if DPS had its 8.5% deduction, the PERA school division would forever be short funded. So, PERA insisted there be a true up every 5 years to ensure DPS' funding level was at least the same as the PERA school division's. This true up became even more important when, in 2010, legislation was passed that requires all divisions of PERA be fully funded by 2040, regardless of impacts on state agency budgets.

You can imagine how warmly DPS received inclusion of the true up component in the SB 09-282 legislation. DPS lobbyists went into overdrive. Testimony was given, by now-DPS superintendent Tom Boasberg, that such a true up was completely unnecessary. Still, PERA insisted it be there.

Things came to a head, and Chris Romer entered the picture. He met with the PERA board of directors and reportedly claimed that, if PERA insisted on the true up, the retirement system would find little Democratic support in the future. PERA called Romer's bluff, and the true up remained in the legislation, which was signed into law May 21, 2009. Based on SB 09-282, the merger, along with the components of the legislation, were to take effect on January 1, 2010.

DPS, however, wasted no time. At the June 2009 DPS school board meeting, DPS staff recommended reducing the District's employer contributions to the pension system to the amount stipulated by SB 09-282. DPS-RS complained that the legislation did not take effect until January 1, 2010, but Tom Boasberg assured the DPS-RS board this was not the case. DPS-RS still demurred. Then, Chris Romer wrote a letter to DPS-RS stating that DPS was well within its rights to reset the contribution level based on the legislation. Romer wrote --

In order to determine the required contribution for DPS, we understand that DPS, DPS-RS, and PERA worked closely together on an actuarial analysis that set DPS' employer contribution levels at a level that would accomplish the legislation's goal of on equal funding ratio of the DPS Division and the rest of the School Division at the end of a 30 year actuarial period.... That contribution level took into account the annual cost of DPS' pension debt (or PCOPS) obligations, the proceeds of which were contributed to DPS-RS as employer contributions to the pension. There is, of course, no economic difference between the PCOPs contributions and other forms of employer contributions.

...In the initial draft of the legislation, the merger was to take place on July 1, 2009. During discussions on the bill, we (Romer and Paula Sandoval) understand that PERA and DPS-RS requested the effective date be pushed back to January 1, 2010 for administrative reasons relating to effecting the merger. There was never any discussion at the time of which we are aware that the economics underlying the legislation would change as a result of the delay in its effective date.

In fact, the legislation does stipulate that economic components of the legislation were delayed until 2010. However, DPS-RS realized that arguing with Romer was a waste of time, as the DPS school board could, in theory, set the district's contribution level to whatever it wanted regardless of any legislation, which was one of the reasons DPS-RS wanted to join the PERA system in the first place. Thus, DPS-RS relented, knowing it would have the last laugh when the merger actually went through and PERA's contribution rates took effect.

So here we sit, taxpayers in the State of Colorado, all blissfully unaware of this political intrigue. But taxpayers beware: if DPS is allowed to continue taking its deduction from the District's contributions to PERA, the deduction will generate an unfunded liability of just over $1 billion by 2015. This liability is calculated using figures provided to the Denver Public Schools Board of Education on June 25, 2010 and based on the loss of 5 years' return on investments at 8%. (This is the rate of return recently established by PERA's actuaries.)

This reality looms very large on the horizon of future DPS budgets. Remember, every division of the PERA system is required to be fully funded by 2040 and the 2015 true up will have to address this requirement. If in 2015, PERA's actuaries find that DPS' portion of the retirement system is $1 billion underfunded, PERA and the state legislature will require an increase in DPS' contribution to the PERA system. This increase will likely be very painful.

Doing the math, DPS will have to pay about $90 million per year ($1 billion over 25 years at 8% interest per year) on top of what it would otherwise be paying to PERA. If that were to come to pass, and DPS' ability to deduct its 2008 pension debt were to be removed so as not to have another fiscal disaster in 2020, DPS would pay PERA about $224 million per year. (This number is based on an anticipated PERA contribution rate of 21.95% of covered salary. DPS projects its covered salary will be $612 million in 2015, for a payment of about $134 million.)

Let's be honest here, DPS is unlikely to have a salary load of $612 million, but that is the number provided to DPS' school board members by David Suppes on June 25, 2010. Why do I believe this number to be inaccurate? Well, DPS' total budget for the 2010/2011 school year is about $720 million. I don't see that number increasing dramatically unless the voters of Denver really pony up some coin in the voting booth to provide DPS with a huge influx of money.

This being the case, let's say DPS' covered salary is more like $500 million, a much more reasonable number. At 21.95%, DPS' payment to PERA would be ~$110 million. Add the $90 million to make up the unfunded portion of PERA, and DPS is still paying a budget-busting $200 million per year, or about 27% of its total yearly budget of $720 million.

Should these numbers come to pass, it will be too late to address the pension issue at DPS, perhaps even the financial viability of DPS itself. Coloradans will likely have to choose between the retirement system, which is mandated by law, and DPS, which is mandated by the state's constitution. If, as is likely, our state chooses DPS, Colorado will face one of the largest class action lawsuits in its history: every member of the DPS division of PERA will sue the system for the benefits they paid for over the past 30 years and squandered by Bennet, Romer, and Boasberg in 5 years.

Some big questions are out there about Romer's involvement in all of this:

  • What was Chris Romer's involvement with Michael Bennet in the 2008 PCOPs transactions? I requested information from JP Morgan about who sat in the lead banking chair for the transaction. After some brief back and forth, JP Morgan wouldn't provide the information. I was told this type of information is not publicly available, despite the fact that public funds were involved.
  • Who in the Colorado Senate architected the deduction for DPS' PCOPs debt? It sure wasn't PERA pushing for it, and I doubt Paula Sandoval, the bill's sponsor, knew a lick about the transactions JP Morgan and the rest of the Wall Street gang were using to get money out of DPS. Further, the coincidence between 8.5% of $750 million and DPS' PERA contribution rate is too strong to ignore. They both work out so as to practically cancel each other out. Someone who understood the inner workings of the 2008 PCOPs transaction would have to have concocted this scheme, and Romer fits that bill exactly.
  • Why was Romer so aggressive when he went after PERA during the SB 09-282 legislative process? On the surface, the true up was no skin off Romer's nose. He wasn't even a sponsor of the legislation. Moreover, people of political importance are on the PERA board, like State Treasurer Cary Kennedy. It was taking a big risk for Romer to stand up to this board. It seems like it could be that a much bigger risk was out there for Romer to take this seemingly meaningless risk.
  • Last, but not least, why would Romer write a letter to the DPS-RS board of director's stating that it was okay for contributions to the pension system to be reduced in July 2009? The legislation clearly says this is not the case. Even then, why didn't he, along with Tom Boasberg, understand it was well within the DPS board of education's right to reduce the contribution rate anytime it wanted? It just doesn't make sense.

Someone in the Colorado legislature ought to look into these questions, but maybe our legislators are afraid of what they might find.

The Romer family carries a big political stick here in Colorado. Roy Romer is a former DNC chair and a real mover and shaker as a consultant in Washington DC. Most of the Romer kids work in the world of high finance. It is clear the Romers have lots of money to throw around during campaign season.

However, a clear case exists for conflict of interest, even outright malfeasance, if public officials engage in transactions that use public money to drive profit for the public official's employer. It is even worse if, in fact, the public official helps craft legislation to hide the transaction's costs. I'm pretty sure such actions, if they occur, are illegal. They are certainly immoral.

The circumstantial history surrounding Chris Romer is not a pretty one. The fact that he led most, if not all, of JP Morgan's public financial transactions in Colorado is disturbing when coupled with the outcomes of some of those transactions. The fact that he may have had a hand in crafting legislation that helped our now U.S. Senator Michael Bennet hide the costs of DPS' transactions is more than disturbing. The fact that he was willing to bully officials responsible for our state's retirement fund, all of which is funded by taxpayers' money, is outrageous.

Most troubling is, however, Romer surely understood the ramifications of the 8.5% deduction. If Romer was involved in crafting SB 09-282, he should have known the deduction's effects on the DPS' retirement system. As a Colorado State Senator, doesn't Romer have a responsibility to protect assets built up by, ultimately, taxpayer contributions? After all, the taxpayers actually fund DPS' existence, and that existence funds the pension via employee and employer contributions. Romer's apparent disregard for this taxpayer-supported asset seems to be the height of disregard for his responsibilities as a public official.

If our state officials are serious about accountability, let's start by holding those in our legislature accountable. Let's pass legislation that keeps those in state public office from doing business with the state's legal or public entities. The same should be true for any local public entities that exist in the area represented by that state official. This should be the minimum effort taken to curb this type of behavior.

More rigorous would be to investigate Romer's actual role in the SB 09-282 legislation coupled with his role in the 2008 PCOPs financial transaction. The evidence suggests that Romer's' role was much greater than it appears on paper. If Romer had a significant hand in putting the 2008 PCOPs deal together and in architecting the SB 09-282 legislation, his actions are in direct conflict with his role as senator. If this is the case, action should be taken against Mr. Romer.

Really, we are talking about what should be common, ethical sense. If politicians can't do it, we the people have to protect ourselves from predation.