PITTSBURGH -- A Team 4 investigation finds some local school districts losing millions of taxpayer dollars on risky Wall Street investments.

For some the results have been disastrous, even before the market crashed.

The investments are called "swaps."

Team 4's Paul Van Osdol took a look at the school districts doing swaps. What follows is a transcript of his report.

Watch Paul Van Osol's Report

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Paul Van Osdol: From Butler to Bentworth, North Allegheny to South Park, five years ago the Legislature -- after heavy lobbying from financial firms -- allowed school districts to do swaps. That same year famed investor Warren Buffett called these types of investments "financial weapons of mass destruction."

The pitch from the Wall Street hotshots sure sounded good to school board members in Butler. They'd get $730,000 up front -- just what they needed to plug a budget hole and avoid a tax increase. All they had to do was agree to an interest rate with JP Morgan.

Tom King, Butler School District: In order to get the kids on the bus, send them to school and educate them, we needed to come up with another $700-some thousand."

Paul Van Osdol: But five years later that $730,000 gain evaporated into a more than $5 million loss. That was no surprise to Butler County Controller John McMillin.

John McMillin, Butler County Controller: "I mean, you're betting against the house in a casino run by very smart financial types in New York."

Paul Van Osdol: Butler is now suing JP Morgan, alleging the Wall Street firm earned $890,000 in fees, more than the district got in cash, and never disclosed it. The lawsuit also accuses Butler's financial advisor, Investment Management Advisory Group or IMAGE, of actually working with JP Morgan in a "collusive arrangement." Neither JP Morgan nor IMAGE would return Team 4's phone calls.

According to documents filed with the Financial Industry Regulatory Authority, the Justice Department is now investigating the role of JP Morgan and other financial firms in swaps transactions. The documents reveal that JP Morgan fired one of its brokers named in the Butler lawsuit -- Michael Lena -- after he disclosed he was a target of the federal investigation.

As for IMAGE, two years ago the FBI raided its office outside Philadelphia.

The controversy has angered parents and taxpayers in Butler, where the school tax rate has soared 24 percent in the five years since the deal was done.

Beverly Schenck, Butler Township: "They might as well have taken our money to Las Vegas and gambled with it because that's exactly what they did."

Paul Van Osdol: "Are you happy with the fact that this money is now in the hands of JP Morgan?"

Jessica Thomas, Butler Township: " Absolutely not. I would like to see the money spent on the kids and the school district."

Paul Van Osdol: The district lost $5.2 million in the swap. That money could have been used to buy a laptop computer for every one of Butler's 7,900 students, from kindergarteners to high schoolers.

John McMillin, Butler County Controller: "You're gambling with monies that would be available for textbooks and technology. But sadly, it ends up in the pockets of some Wall Street baron."

Paul Van Osdol: Last month JP Morgan announced it will no longer do swaps with school districts or municipalities. Its Cranberry office -- which was headed by Gregory Zappala, brother of the Allegheny County district attorney -- has shut down.

An interest rate swap is like a more complicated adjustable rate mortgage. The bank pays the school district a fixed rate. The school district pays the bank an adjustable rate. But that adjustable rate is soaring because of the recent turmoil on Wall Street, rising from 1 percent to more than 7 percent in some cases. That's costing some school districts tens of thousands of dollars per month.

Wayne Gerhold: "This is new territory for everyone."

Paul Van Osdol: Last week the West Jefferson Hills school board moved quickly to put a hold on its interest rate swap, after its financial advisor warned the district could end up losing $1 million this year.

Shauna D'Alessandro, School Board President: "We don't want to lose that kind of money in our district because we work too hard to conserve taxpayer dollars here."

Paul Van Osdol: West Jefferson Hills did its first swap deal in 2004, legendary investor Warren Buffett called swaps and other so-called derivatives "financial weapons of mass destruction."

Paul Van Osdol: "Does the school district know something that Warren Buffett doesn't?"

Shauna D'Alessandro, School Board President: "No, I don't know anything about that."

Paul Van Osdol: Other school districts with swaps are also feeling the pain of the market crash. In September, North Allegheny's monthly interest payment on its swap soared from $62,000 to $91,000, a 46 percent jump. In July, Shaler actually earned $5,700 on its swap. But in October, the district had to pay more than $34,000.

John McMillin, Butler County Controller: "I haven't seen one yet that isn't under water."

Paul Van Osdol: And swaps don't come cheap. West Jefferson Hills paid $540,000 to lawyers and investment advisers. The Shaler school district paid $1.2 million. And Pine-Richland paid $2.1 million, including more than $1 million to terminate a swap.

The districts say they need to pay big fees because swaps are very complicated, even for CPAs like the school board president in West Jefferson Hills.

Paul Van Osdol: "Do you need to be a CPA to understand these swaps?"

Shauna D'Alessandro, School Board President: "Yes, probably even more so. They are difficult to understand."

Paul Van Osdol: But now school districts do understand what can happen when these complicated investments go south.

Paul Van Osdol: What lessons should other school districts learn from what happened here in Butler?

Beverly Schenck, Butler Township: "You don't get anything for free."

Paul Van Osdol: Most school district swaps are in the red, but the districts have not been forced to terminate them like Butler. As bad as it is in Butler, it's much worse in some other places. In fact, the biggest county in Alabama is on the brink of bankruptcy because of swaps and other derivative deals.

Both candidates for state treasurer said they want to repeal the law that allows school districts and cities to do swaps. As for the federal investigation, no one has been charged.

To find out whether your school district has done a swap look at the sidebar to the right of this story.

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