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Wary Eyes Monitoring Wall Street

By Linda Jacobson — September 18, 2008 6 min read

School business officials kept a close watch on the financial markets this week—and on district investment portfolios and teacher-retirement funds—as stock prices gyrated and once-sound institutions got government bailouts or crumbled into bankruptcy.

While financial observers said it was too soon to predict how Wall Street’s upheaval might affect school districts, they generally offered reassurance, even as the federal government late last week rolled out a plan to rescue banks from billions of dollars in bad debt. Several experts said that state-backed employee-pension funds—and even supplementary retirement accounts such as those offered by the troubled American International Group Inc.—should be secure.

More murky, however, is the impact of the financial crisis on districts’ own investments and the effect any further tightening of the credit market might have on their ability to get affordable financing for capital projects.

School systems are hardly insulated from broader market troubles: In Florida late last year, several school districts, cities, and other government agencies were forced to pull their money out of a state-run investment pool after certain holdings were downgraded by bond rating agencies.

Trader Tom Kalikas, center, works on the floor of the New York Stock Exchange on Sept. 17, a day on which stock prices plummeted.

Before turning to a New York City-based asset manager to help repair the damage, the state of Florida temporarily closed that fund, leaving some districts without a way to pay their employees. (“Fla. Fund’s Woes Spark Investment Jitters,” Dec. 12, 2007.)

“These are all long-range problems,” Ronald Snell, the director of the state-services division at the National Conference of State Legislatures said of worries stemming from Wall Street’s troubles. “We don’t know yet where this is going to go. It could mean a sustained period of lower investment values.”

The most immediate impact, finance experts said, would be felt by any district that might have investments tied up with New York City-based Lehman Brothers Holdings Inc., the famed investment bank that filed for bankruptcy last week.

“While the great majority of school districts are very conservative with investments, the sheer number of districts across the country means it would not be surprising if a few had ventured into risky territory and now are regretting it,” said Bob Ward, the director of fiscal studies at the Nelson A. Rockefeller Institute of Government in Albany, N.Y.

Scott Pattison, the executive director of the National Association of State Budget Officers, based in Washington, said that because investments for the public sector are so diversified, the failure of one or two financial institutions should not have serious consequences.

‘A Lot of Nervousness’

Market turmoil also may raise concern among school system employees about state pension funds for teachers.

But Mr. Snell of the Denver-based NCSL said that while such funds might lose some money, school retirees would not be directly affected because states have to contribute to those accounts, which guarantee a certain defined payout for retirees.

Nationally, public-employee pension systems covering educators, including K-12 and university employees, had assets totaling $2.37 trillion in their trust funds as of January, according to the National Council on Teacher Retirement.

“Those pension benefits are as solidly guaranteed as anything can be,” Mr. Snell said.

A greater source of anxiety for many teachers may have been the fate of AIG, a huge insurance and financial-services company that is a major provider of 403(b) retirement accounts. The company was forced to the brink of failure by problems stemming from collapse of the subprime-mortgage market, and was saved last week by the Federal Reserve, which is providing an $85 billion emergency-loan package.

“There is a lot of nervousness,” said Dan Otter, a former elementary and middle school teacher who operates a Web site that gives advice to teachers on saving for retirement. (“Unions’ Deals With Brokers Raise Issues,” June 7, 2006.)

A 403(b) account, similar to a 401(k) in the corporate sector, is a voluntary retirement-savings program offered by districts and other nonprofit organizations to their employees.

A “talking points” memo from AIG, posted on Mr. Otter’s site, indicated that the company’s problems won’t affect district employees who have annuity products from AIG because those policies are underwritten by the Variable Annuity Life Insurance Co., or VALIC, which the memo described as a “strong insurance company.”

“Although AIG faces short-term liquidity pressures,” the memo says, “the company differs from other financial institutions that have been under pressure in that AIG has strong, well-positioned businesses in diverse markets around the world and a deep asset base.”

But given the doomsday tone of much of the news coverage, many employees are nervous, said Mark Pepera, the chief financial officer of the Westlake, Ohio, city schools. About 70 percent of the district’s 630 employees participate in 403(b) plans, he said. One of the district’s providers is AIG VALIC, an AIG affiliate.

“The headlines are creating somewhat of a panic among employees,” Mr. Pepera said. “But it doesn’t seem that the company’s financial woes will affect them.”

The Los Angeles Unified School District uses AIG as one of its providers for a 457 plan, which is similar to a 401(k) or a 403(b), but doesn’t include a penalty for making an early withdrawal. Gregory Kildare, the chief risk officer for the roughly 700,000-student district, said that AIG acts simply like a brokerage company, and that the employees actually have their assets invested in other companies.

“At this point, I’m not concerned about [AIG] insurance products,” he said.

Opportunities and Risks

With many states already trying to close budget deficits, the tumult in the financial world couldn’t come at a worse time.

Still, the outlook was not all bad. Mr. Snell noted, for example, that if the Federal Reserve were to cut interest rates, that could prove “a good time for the public sector to be borrowing.”

The credit crisis can cut several ways, however.

For example, school districts sometimes purchase bond insurance to improve their credit ratings. The insurers can sometimes be linked to riskier investments and be downgraded by bond-and credit-rating agencies. That could lead districts to steer clear of buying such insurance and even to raise property-tax rates in order to get a higher bond rating on their own.

One of the possible bright spots in the current economy might be declines in oil prices, which could help districts that have been struggling with transportation-fuel and utility costs. (“Increasing Fuel Costs Hit Hard,” July 16, 2008.)

The price of a barrel of crude oil fluctuated last week, falling to less than $100 at some points. But Mr. Snell suggested relief in that area is likely to be temporary. “In the long run, energy prices are going to rise,” he said.

Thomas White, the executive director of Michigan School Business Officials, based in Lansing, sees the current crisis as an opportunity for learning.

“Everybody is looking to maximize their investments, and making sure their investments are secure,” he said. “It’s just a matter of being cautious and asking questions.”

The Associated Press contributed to this article.

A version of this article appeared in the September 24, 2008 edition of Education Week as Wary Eyes Monitoring Wall Street

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