Hamburg Area School District

Press Release

TO: 69 News, The Reading Eagle and The Hamburg Item
FROM: Mr. Steven Keifer, Superintendent

For Immediate Release

Hamburg Area School Districts Response to the Attorney Generals Audit
Findings Regarding Interest Rate Swap Agreement

The Auditor General of the Commonwealth of Pennsylvanias recently released audit of the Hamburg
Area School District contains a finding that Hamburg Area School District lost approximately
$4.4Million on an interest rate swap. In press discussions that followed the release of the report, the
Auditor General stated "Every possible dollar needs to get into the classroom. Four million dollars could
have gone towards improving education in the Hamburg area without placing an additional burden on
taxpayers."

The District would like to make clear that the methodology and conclusions of the Auditor Generals
report are deeply flawed. The report calculates that the District lost $2.05Million while the swap was in
effect and lost an additional $2.386Million when the District chose to terminate the swap. The Auditor
General calculated the $2.05Million loss by comparing the difference the District paid on the fixed rate
portion of the swap with the variable rate portion the District received from the initiation of the swap
in 2005 through its termination in 2011. The District is unaware of any known financial accounting
standard under which this constitutes a loss. The $2.05Million represented the Districts cost of
interest on the debt to which the swap related under the Local Governmental Debt Act. This is how the
District reported that cost in its financial statements as reviewed by its independent Certified Public
Accountants and the Commonwealths Department of Education, neither of whom treated the
expenditure as a loss. The Attorney Generals conclusion is akin to a homeowner selecting to finance
their home at a fixed rate for 25 years instead of using a more risky variable rate loan and then having
the Auditor General looking back after six years and saying the homeowner had lost money.

In order to undertake the building of the Perry Elementary project, the District determined in 2011 it
was in its best financial interest to terminate the swap and pay the associated $2.386Million
termination payment, as required by the Local Governmental Unit Debt Act, when it refinanced the
original debt as part of a consolidated borrowing that included $18.62Million for the Perry project. The
Districts debt service following this borrowing was actually reduced by $200,000 from the existing
budgeted amount.

The idea that $4.4Million did not get into the classroom or caused the District to raise taxes is simply
not accurate. The Districts financial health from 2005 to present is strong. During the period the
Auditor General is claiming the District lost $4.4Million, the Districts fund balance increased despite
rising costs across the board. The District was able to accomplish this with tax increases of 1% or less
per year, an amount well below each relevant Commonwealth Act1 index limiting tax increases.
Further, Hamburg Area School District is in the bottom 1/2 of all Berks County school district tax rates.

Immediately prior to the Auditor Generals June report , the District received a credit rating upgrade of
A+ to AA-from Standard and Poor's, one of the two largest worldwide credit rating organizations. In the
report, Standard and Poors cites Solid financial operations, resulting in what we view as very strong
finances and what we consider solid with strengthening reserves supported by consecutive
operating surpluses. They also recognize Officials have not had to use layoffs or furloughs to maintain
structural balance.

These results fly in the face of any idea that the District somehow lost $4.4Million in the same time
period.

2005 Decision to Enter into Swap Agreement
The Districts decision to enter into the swap agreement in 2005 was well thought out and supported
by due consideration. The District was undertaking a $25Million building project for the Tilden
Elementary School with a twenty year repayment period and wanted a fixed interest rate obligation in
order to budget with certainty for debt service. The District considered using fixed rate bonds or
achieving a synthetic fixed rate using variable rate debt with a swap agreement.

As required by the Local Governmental Unit Debt Act, the Board retained the services of an
independent swap advisor who met multiple times with the Board and administration over a six month
period to review both the benefits of the swap and the related risks. In the swap advisors report, the
rationale for entering into the swap is clearly enumerated: As a result of the current interest rate
environment, the synthetic fixed rate that will be established on the 2005 Swap is expected to be (1)
extremely low based upon historical averages, (2) below the fixed rate the School District would be
able to achieve through a traditional fixed rate bond issue

The 20 year swap rate of less than 4% was lower than the rate which could have been achieved using
fixed rate bonds.


2011 Decision to Terminate the Swap Agreement
As stated previously, the District chose to terminate the swap agreement in 2011 as part of a
consolidated borrowing which provided for the refunding of the remaining balance of the 2005 Bonds,
payment of the swap termination and $18.62Million for the construction of the Perry Elementary
School. The Perry project was the last new construction on the Districts master plan and had been
considered for several years prior to 2011.

Beginning in January of 2010, the Board received presentations during their regular public meetings
from the Districts underwriter and financial advisor of the various options available to finance the
Perry project. There were six presentations made from January 2010 through March of 2011 when the
final decision was made. The Board considered three possible options for financing the Perry project:
(1) Leave 2005 Bonds and swap agreement in place and issue level debt; (2) Leave 2005 Bonds and
swap agreement in place and wrap new money for Perry around 2005 Bonds; (3) Refinance 2005
Bonds, terminate swap and issue consolidated debt to pay those costs plus Perry project. Both option 1
and option 2 would have required significant tax increases to implement.

The District would like to make clear that the $2.386Million termination payment was not a fee as
characterized by the Auditor Generals report. The termination payment is not an extra charge, fee or
penalty but rather represents the total value of the differential between the swap rate at initiation in
2005 and the lower rate in effect in 2011. The termination payment was made in order to allow the
District to take advantage of the substantially lower rates that existed in 2011 for the refinancing of the
2005 Bonds. The potential of having to pay a termination payment was clearly addressed in the 2005
independent swap advisor report and to the Board in 2011. To continue the prior analogy, the
termination payment is equivalent to a homeowner paying points in order to obtain a lower interest
rate on a mortgage versus not paying the points and paying a higher annual interest rate.

Following over 14 months of consideration, the Board chose the third option and terminated the swap
agreement as a part of that process. As a result of the 2011 transaction, including the cost of the
termination payment, the District was able to build the Perry project while reducing its debt service by
$200,000 annually from the existing budgeted figure.

Conclusion

The 2005 decision to initiate the swap was a prudent and well-reasoned decision, resulting in a
lower rate than could have been achieved using fixed rate bonds.
The 2011 decision to terminate the swap was the correct decision following significant
consideration, resulting in the District being able to fund the Perry project and achieve annual
savings of $200,000 to prior budgeted debt service.
The District does not agree with the claim of the Auditor General that it lost $4.4 Million on the
swap agreement.
The districts refinancing decisions were as appropriate to the economic conditions of the times
as they were to homeowners decisions to refinance their own mortages.
The Districts fund balance has increased since 2005 with small annual tax increases.
The Districts overall strong financial condition is reflected in its upgraded rating of AA- by
Standard and Poors.