West Allis - The $7.3 million the West Allis-West Milwaukee School District gets from the settlement of a nearly decade-long lawsuit will go in the bank, school officials said.
The money comes as a settlement of $200 million in investments gone wrong by West Allis and four other school districts. They filed a lawsuit in 2008 alleging fraud and misrepresentation against the Royal Bank of Canada and the investment firm Stifel Nichlaus & Co.
West Allis and the other districts will get their money back, with millions in debt forgiveness, under two agreements that were finalized last week.
"It was long overdue," said West Allis-West Milwaukee School Board President Jeff Sikich. "I'm glad the SEC (federal Securities and Exchange Commission) helped us in our fight."
Board member Pat Kerhin said, "It's about time."
Both board members said the money will go to the district fund balance that is $2.4 million in the hole, said Andrew Chromy, district business administrator.
The deficit happened because the district operated for two years in the red, under the previous administrations. Overspending brought the fund balance down to below zero, Chromy said.
The $7.3 million infusion will wipe out that deficit and bring the fund balance up to $4.9 million, he said.
Having even a small fund balance should help the district get better interest rates for the short-term borrowing it does. Like many school districts, West Allis schools borrow money to operate the schools until property tax money comes in, Chromy said.
It's a help
The district borrowed enough to bridge that revenue gap last year and this year, but in the school year starting next fall, it should see somewhat better interest rates, he said.
The district would need about $26 million in its fund balance to avoid short term borrowing, Chromy said. The district probably can eventually get to $20 million, he said.
"Twenty-six million is a best-case scenario," Chromy said.
Although a $4.9 million cushion in the fund balance is better than no cushion at all, it doesn't give much peace of mind, so bare-bones budgeting will have to continue for the next half dozen years, he predicted.
"Only a couple things have to go wrong, and you can chew through $4 million," Chromy said.
According to a news release from the districts and Kravit, Hovel & Krawczyk, the law firm representing them, the settlements reached last week include $63.9 million in cash and $154 million in debt forgiveness.That is the second largest civil settlement in state history, according to the law firm.
Originally, the districts invested $35 million in cash and their trusts borrowed $165 million – for a total of $200 million. With it, they bought the investments, known as collateralized debt obligations or CDOs in 2006. The $63.9 million in cash recovered by the school districts from settlements is nearly twice (182 percent) their initial cash investment.
The investments were more risky than anyone in any of the districts believed and were worth nothing after the recession.