PhillyDeals: Investment woes spur cuts at Girard College

Three years of falling real estate prices, and three bad bets placed with a giant Wall Street bank, have pushed Philadelphia's city-run Girard Estate to make drastic cuts at Girard College, the free boarding school set up by Philadelphia's richest citizen in his will about 180 years ago.

"We have downsized the school," Joseph S. Martz, executive director of the Board of City Trusts, which manages Girard's $500 million in investments, told me in his office Monday.

Girard College - founded through the will of business tycoon Stephen Girard in 1833, two years after his death - still has 50 students enrolled in this year's senior class but is "only taking 24 first graders," Martz said. Enrollment peaked at 752 in the fall of 2007 but fell to 532 in September. Martz says it will likely go below 400 during the next few years.

School staffing has dropped to 205, from a high of 269. There are still plenty of youngsters trying to get in, but officials have had to turn more away.

When he went to work managing the estate four years ago, Martz had hoped to diversify Girard's holdings. The estate owns office buildings in Philadelphia and upstate cities, as well as Schuylkill County hard-coal fields, where contractors also cut timber, run windmills, and hope to find gas.

The estate raised $88 million leasing its headquarters building, currently run by SSH Management L.L.C., and plowed that money into real estate funds and new buildings - including 3501 Island Ave. in Southwest Philadelphia, leased and occupied last week by Deutsche Bank AG's trucking affiliate, DB Schenker.

But when investment markets collapsed in the fall of 2008, the value of Girard's stock-and-bond portfolio fell from more than $400 million to about $250 million.

The trust will run Girard College this year on a $23 million budget. Building sales and economies have cut the estate's administrative expenses nearly in half, to $1.8 million, on Martz's watch. The estate's staff now totals 17, down from 72.

Girard has trimmed its debt from $181 million in the early 2000s to $155 million, and the trust has set aside millions more to pay back a $42 million mortgage on a property it owns, the Aramark tower, by its due date in 2012. Once the loan is paid down, "I think it's quite an attractive sale candidate," Martz told me.

But the bleeding has increased from a string of interest rate "swaps" the city placed with the giant Wall Street bank JPMorgan Chase & Co. in connection with bonds the estate sold in 1999, 2001, and 2002. JPMorgan has defended its swaps as legitimate financial-planning tools.

The swaps were supposed to protect Girard from rising interest rates. Instead they have cost millions, based on what turned out to be an uneven trade:

The estate pledged to pay JPMorgan about 5 percent interest on the bonds, in exchange for floating-rate payments from the bank.

The bank's payments were set at prices based on the arcane Securities Industry and Financial Markets Association Municipal Swap Index, which yielded about 5 percent when the swaps were made but is currently yielding less than 1 percent as U.S. interest rates remain at record lows.

Now, Girard has to pay the difference. Girard owes a cumulative $29 million on the swaps, more than one year's budget for Girard College. Girard has not had to pay out the cash; instead, it is using properties it owns as collateral. But that keeps the estate from being able to sell some of its buildings to raise more money.

Other Philadelphia institutions, from the school district to the Delaware River Port Authority, have lost tens of millions more from swaps, which enriched financial advisers while impoverishing taxpayers and toll payers. Bloomberg News estimated in a story last week that state and local governments had paid Wall Street banks a collective $4 billion in recent years for these interest-rate bets (swaps) gone wrong.

As Martz notes, the swaps could still end up making money for Girard - if interest rates recover before the swaps expire years from now. A real estate recovery would help a lot more. But it won't likely come soon enough for Girard College's next few entering classes. "We will stay smaller," pledges Martz, until the markets come back.