Butler School Board directors owe taxpayers in the district an explanation of how the board got into its costly swaption mess — and what the board will do in the future to avoid similar mistakes.

Other school boards in Butler County, and across the state, that have gotten caught up in costly financial bets should also offer both an explanation and a mea culpa.

Back in February, Bloomberg Markets magazine revealed that 110 school districts in the state had entered into risky swaption deals with Wall Street investment banks since 2003, when lawmakers in Harrisburg voted to allow school districts to enter into the complex financial deals.

The fact that Butler has a lot of company across the state does not lessen the obligation to publicly explain how it got into the mess that cost district taxpayers $5.2 million to get out of last week.

Swaptions, which are options on an interest rate swap, and auction-rate securities are considered derivatives, a classification of high-risk financial instruments that are not regulated by federal financial authorities.

Legendary investor Warren Buffet has said he views derivatives as "financial weapons of mass destruction"and "financial time bombs." But apparently school board members at Butler, South Butler and Mars — along with their bond underwriters and financial advisers — disagreed, or thought they knew better.

The complexity of the deals and lack of government oversight should have been a warning to school boards to stay away. Instead, many school boards saw the upfront payments for entering the deals, which in Butler's case was $730,000, as money for nothing.

Now that the school district has moved to pay $5.2 million to get out of the deal, it's clear that it was not free money.

In addition to criticizing the high risk in these deals, and suggesting that school board members did not understand what they were doing, the Bloomberg article also noted that fees were not disclosed.

Bloomberg's analysis suggests that while Butler was paid $730,000 when it entered into its swaption deal, JPMorgan Chase kept $1 million for itself. The board apparently was never told, and apparently never asked, what the deal was worth — estimated at $2.2 million by Bloomberg — or how much the investment bank was keeping for itself.

These high fees led a Bloomberg columnist to write this week that the swaption deals were viewed by JPMorgan and other WallStreet investment banks as a "money train." Columnist Joe Mysak argued that as these deals unravel, and wind up costing school districts millions of dollars to get out of, the money train might be coming to a halt.

Mysak wrote that investment banks "considered these deals as perpetual money machines. If one interest-rate swap wasn't working quite the way the issuer thought it should, that was fine; they could set up another one, and buy a bunch of options from the issuer, as well. So you could never really say the deal was a loser. There was always another deal, and you could simply borrow the amount you needed to terminate one and begin another."

Did the members of Butler's school board understand this is how swaptions worked? Probably not.

Looking back a year or so at newspaper reports across Western Pennsylvania, it's shocking that these deals were handled as fairly routine financial matters at Butler and other districts in the area. Now, the deals are being exposed as highly risky bets that are mostly turning out to be very bad deals for school districts, but big money makers for the investment bankers.

Officials at Butler, and other school districts involved with swaptions or auction-rate securities, owe it to their taxpayers to publicly explain what happened.

It will no doubt be uncomfortable to do so, but school officials should reveal how they were talked into these deals and by whom. They should explain why they thought they understood complicated financial details well enough to take on such risks with taxpayers' money.

Boards also should explain why they didn't insist on competitive bidding, with millions of dollars at stake, to get different opinions — and, most likely, better terms.

Boards at Butler, and other districts with exposure to swaptions or auction-rate securities, should not only offer an explanation of what they did and what they did wrong (or right), they also should tell taxpayers what changes they will make in the future regarding such financial matters.

Competitive bidding and more than one financial adviser would be a good place to start.

Taxpayers deserve a full and frank explanation, not actions designed to sweep the issue under the rug.

And while on the topic of explanations, state lawmakers also should reveal why they voted to allow school districts to enter such complex, risky and unregulated deals — and how much lobbying from investment banks preceded that vote.