In a motion to dismiss filed Friday in response to a lawsuit, Denver Public Schools (DPS) defended its use of lease-purchase agreements — a financing method critics say sidesteps required voter approval for public debt that could leave students without access to their schools if the district defaults.

“This allegedly unlawful ‘scheme’ is actually a common and completely legal method of financing projects for public entities in a manner that is authorized by statute and has been repeatedly ratified by Colorado courts,” DPS officials said in their filing.

As previously reported by The Denver Gazette, DPS has quietly taken on hundreds of millions of dollars in long-term debt through a controversial financing tactic that sidesteps the state’s constitutional ban on assuming debt without public approval.

State law does permit school districts to use “lease-purchase agreements” without voter approval, but only if the payments come from general or capital reserve funds and are subject to annual appropriation, in this case by the board of education. Public records show at least some of the lease payments tied to Certificates of Participation (COPs) appear to have been made from a fund with bond proceeds, raising questions not only about compliance with state law and the constitutional exemption these transactions rely on, but also whether this could run afoul of federal securities regulations.

District officials countered in court documents that the lease payments are appropriated by the board annually.

“DPS does not pay for COP-related obligations from its bond redemption fund,” court documents say.

Here’s how the lease-purchase agreements work:

Rather than ask voters to assume additional debt through a bond or mill levy override, the district transfers ownership of certain schools to the Denver School Facilities Leasing Corporation — usually for $10. Then, to raise the capital sought by the district, the Leasing Corp. finds private investors to buy COPs. DPS then agrees to rent the school buildings for millions of dollars annually.

The strategy has allowed DPS to accumulate debt that rivals the nearly $1 billion bond voters approved last fall — all without putting a single measure on the ballot. Once interest and fees are factored in, the district has ended up being on the hook for more than twice the borrowed amount in some instances.

Critics argue the money spent on these lease payments could be used to reduce class sizes, boost teacher pay or expand student support services as a significant portion of COP costs isn’t directed to classrooms, but to the private investors and financial firms involved in the deals.

In fiscal year 2024, for example, the district spent $15 million in lease payments that could have covered last year’s shortfall in cost-of-living adjustments for educators — and then some.

Union leaders say the tradeoffs are clear.

“If you had that money every year, you could give every school an extra teacher,” DCTA President Rob Gould, who is also a special education teacher, has said.

The union represents roughly 4,200 teachers across the district.

While the union highlights the impact on students and staff, court filings reveal how DPS defends the underlying financial structure that fuels those costs.

Officials allege in court documents that the Leasing Corporation is actually a “blended component unit” of the district. A “blended component unit” refers to a legally separate entity so closely tied to a public agency that — for financial reporting and oversight purposes — it is treated as part of the government.

But district officials also claim these lease agreements are legal — in defiance of Colorado’s debt restrictions — “because there is no similar constitutional prohibition on non-governmental actors” like the Leasing Corp. from taking on debt.

That contradiction raises concerns about transparency and accountability — concerns echoed by a national expert on municipal finance, who sees the strategy as a maneuver that effectively lets DPS have it both ways.

“They are quite frankly trying to circumvent voters or trying to make their debt appear not as bad as it is,” said Deborah Carroll, director of the Government Finance Research Center and a public administration professor at the University of Illinois at Chicago.

Carroll added: “They’re still using the property as collateral and they still have an obligation to the lease agreements. If they stop paying for them, they would lose the collateral.”

The Leasing Corp. cannot be separate for the purposes of taking on debt, but also the same entity for oversight and financial reporting, critics argue.

The attorney representing Mamás de DPS said that this undercuts the district’s legal position.

“It’s simply not true that it’s a blended component unit, but they have to say that because that’s what their tax returns say,” said Lisi Owen, a civil rights attorney and founder of Vanguard Justice LLC, a firm focused on exposing public corruption. “They’re really stuck in a contradictory position that they’ve taken in the past.”

Owen, who made an unsuccessful bid for Denver district attorney in 2023, added: “They need to pick a story.”

Mamás de DPS allege in its complaint that more than 30 schools are tied up as collateral in these leases. Should DPS ever default, more than 20,000 students could be impacted at those schools, which include Harrington Elementary, Lake Middle and East High School, the district’s flagship campus.

District officials have rejected that characterization, downplaying the risks.

“This never happens,” DPS Chief Financial Officer Chuck Carpenter has said. “It’s not something that is practically possible.”

For the newspaper’s investigation, The Denver Gazette asked the district for detailed information about its lease-financing arrangements, including the total amount paid to the Leasing Corp., how those payments are funded and which school properties are being used as collateral.

DPS Spokesperson Bill Good declined to comment last week, citing the ongoing lawsuit. But on Tuesday, Good took exception with the characterization that the leasing strategy, begun four decades ago, has continued under Superintendent Alex Marrero.

“While DPS is still currently making scheduled payments on these loans, the last time the district took formal action on a COP was January 2020. Dr. Marrero was not hired until May of 2021,” Good said in an email to The Denver Gazette.

Good also defended the investment tool the Leasing Corp. uses — COPs — saying it has “been used in a variety of capacities to support DPS students and staff” including the 2008 pension merger of Denver Public Schools Retirement System with Colorado Public Employees’ Retirement Association, or PERA.

That deal cost the district tens of millions of dollars.

Eager to get out of its internal retirement system and merge with the state in 2008, then-DPS CFO Tom Boasberg and Superintendent Michael Bennet — now a U.S. senator — persuaded the school board to issue $750 million COPs with a derivative component. The borrowing carried a variable interest rate tied to market conditions, similar to the adjustable-rate mortgage structure that fueled the subprime housing bubble, which was beginning to burst as the agreement was being inked. Boasberg and Bennet maintained at the time that the severity of the financial crisis — and its impact on the deal — was unforeseeable.

To extricate the district from the deal, Denver taxpayers paid more than $80 million in termination fees, according to reporting in 2010.

The legality of the lease agreements hinges on whether the payments are an annual appropriation, contingent on the board of education’s approval.

Board President Carrie Olson responded to a request for comment Tuesday, but said she would need to gather more information.