About two decades ago, regional and suburban school districts across the Lehigh Valley area began using unconventional and controversial bond transactions to pay for building renovations and new schools.

During the same time, the Allentown School District did nothing. It could not afford the construction projects that more affluent school districts like Bethlehem Area, Parkland, Easton Area and Nazareth Area were doing with the bond transactions called swaps, which bet on short-term adjustable interest rates.

Now, whatever envy ASD officials and parents may have harbored toward their neighbors has been replaced by relief.

Allentown is in a position to withstand the global financial meltdown because it has not tapped into the volatile swap market to fund its new eight-year $453 million rebuilding plan. That can't be said for districts that used the risky swaps to fund construction. Spiraling short-term interest rates have turned those swaps into financial anthrax, sickening school, municipal and county budgets across the Valley, state and nation.

"Our cash cow died on us," said Bethlehem School Director Rosie Amato.

By contrast, Allentown has relied on old-fashioned fixed bonds and a small adjustable rate-bond that are not tied into the complicated swaps which are part of the $2.6 trillion municipal bond market that has been under federal investigation since Jefferson County, Alabama, ran into swap trouble earlier this year and has come close to defaulting on $3.2 billion in bonds.

"We did our due diligence and we are structuring what I think is sound debt projections with great sensitivity to local taxpayers," said George Crawford, ASD chief financial officer.

Swaps, which are layered on top of bonds, were intended to reduce interest payments but that has not happened. Debt payments are up an average of about 4 percent for government agencies that have adjustable rate swaps, said Temple University finance professor Bruce B. Rader.

"This is the strangest situation I've ever seen in the bond market," he said.

Bethlehem district taxpayers have taken the biggest financial hit in the area because the district has the most money tied into swaps.

Bethlehem has done nine swaps since 2003, resulting in 75 percent of its total principal debt ($222.5 million) in adjustable-rate swaps. As a result, records show, Bethlehem district taxpayers paid an extra $1 million when short-term interest rates shot up from 1.9 percent to 8.5 percent in September.

By contrast, taxpayers in Easton, Parkland, Nazareth and numerous other local school districts are not facing such steep bills. Those school districts used a more conservative approach in their financial management.

They tied about 75 percent into fixed bonds and smaller debt portions into straight adjustable-rate bonds and swaps, according to public bond records and interviews.

But exact taxpayer costs in Nazareth, Easton and Parkland and Nazareth were unknown. Nazareth officials could not be reached. In a response to a Morning Call inquiry, Easton provided partial figures of interest payments and Parkland provided none.

Easton interim business manager Marie Guidry said payments to bond holders more than doubled on one of its two swaps, from $54,365 on July 1, when interest rates were low, to $122,400 on Oct. 1, after the rates spiked. But the figures do not include payments to the investment banks that backed the swap.

Parkland provided an explanation on how its two swaps and overall debt management practices have saved taxpayers $7.5 million since 1999. But Parkland did not provide dollar figures for the swaps' interest payments.

In a joint e-mail statement, Parkland Superintendent Louise Donohue and Business Manager John Vignone said the district's finances remain healthy.

Costs could grow if school districts and other government agencies decide they cannot weather spiking interest costs and must pay banks' hefty fees to get out of the swaps. Last week, short-term interest rates hovered between 5.5 percent and 6.3 percent -- well above June's average of 1.6 percent.

Tonight, the Bethlehem Area School Board is expected to learn from two outside financial consultants whether it should spend millions in bank fees to get out of some or all of its swaps and issue new fixed rate bonds.