Meadville Tribune

May 11, 2013

Proposed legislation targets risky interest swaps

By John Finnerty

HARRISBURG — Democratic Sen. Rob Teplitz of Dauphin County led the investigative unit in the Auditor General’s office that exposed the widespread and costly bungling by school officials and local government officials involved in risky interest swaps.

At the time, Teplitz’s boss Jack Wagner called on the Legislature to ban the interest swaps. Bills were introduced in both the House and Senate, but they went nowhere.

Flash forward two years and Teplitz is elected senator, just as the full details of the debt debacle focused on the Harrisburg incinerator came to light.

This week, Teplitz joined three other senators to introduce legislation that would bar schools or local governments from using the credit swaps.

They stood in front of the incinerator.

Teplitz said it is still unclear if the bungling over the incinerator’s finances was the result of criminal conduct, poor legal advice or just bad policy decisions. But the lawmakers have proposed a series of reforms intended to prevent similar mistakes to happen again. Eliminating the use of interest rate swaps by schools and governments is one of their key reforms.

Teplitz said that these “risky and complicated” swaps have cost Pennsylvania taxpayers billions of dollars. From October 2003 to September 2012, 108 of the 500 school districts and 105 local governments had $17.25 billion in public debt tied to swaps, according to the Department of Community and Economic Development. There have been nearly 800 swap transactions.

The bill that would bar the use of interest swaps by most local governments and schools was sponsored by Sen. Mike Folmer, R-Lebanon County.

Folmer said that business managers and other government officials believe they are financially savvy enough to complete the swaps without losing their shirts. But time and again, city and school officials have gotten burned. Mismanaged interest swaps contributed to the problems surrounding the Harrisburg incinerator, which now has $300 million in debt, lawmakers said.

Philadelphia could lose $186 million on an interest swap, but city officials are lobbying to keep the capability to use the transactions, The Bloomberg News reported. The Auditor’s General office first raised the alarm about interest rate swaps by detailing how the practice caused the Bethlehem School District more than $10 million.

The Pennslvania Turnpike lost $109 million on an interest rate swap, Folmer said.

Folmer said that in conversations with financial analysts, he had been assured that the only likely winner in an interest rate swap is Wall Street.

“It’s like a casino,” he said. “The house always wins.”

Folmer said that those in the private sector who want to engage in risky finances are free to do so. But public officials should not be allowed to gamble with tax dollars, he said.


Reform-minded lawmakers meet to discuss priorities

A group of 35 reform-minded state lawmakers met this week to compare notes and set priorities, said Sen. Rob Teplitz, D-Dauphin County, who was one of the co-founders of the reform caucus.

There seems to be the greatest interest in enacting legislation that would crack down on perks for lawmakers, Teplitz said.

The group was announced earlier this year as Teplitz unveiled a package of reform bills he’d authored.

Teplitz’s bills include:

n Legislation calling for election reform to allow anyone to vote in the primary; legislation that would eliminate the automatic pay increase that lawmakers receive each year;

n A pay freeze for lawmakers and the governor if they don’t pass the budget on time; and

n Legislation that would eliminate lame duck sessions, which would prevent lawmakers from passing legislation in the period between an election and the time when new lawmakers are sworn into office.

Teplitz said that his bills do not specifically represent the priorities of the rest of his reform-minded colleagues. Many other members of the reform caucus have sponsored bills aimed at tackling perceived flaws, he said.

The reform caucus includes 11 senators — five Democrats and six Republicans — and 24 representatives — five Democrats and 19 Republicans.

But the reform spirit hasn’t been limited to those who have signed on as part of that group. This week, Republican Rep. Brad Roae of Crawford County announced he has authored a bill that would include safeguards on the way lawmakers bill the state for travel and lodging.

While many private-sector firms require workers to turn in receipts for reimbursement, state lawmakers can get a sum of money, regardless of how much they really spent on lodging and meals, Roae said.

Roae’s bill would bar lawmakers from billing the state for business travel to a committee meeting if the lawmaker is not on the committee. Roae’s bill would also bar lawmakers from submitting per diem requests for holidays or weekends.

Area interest rate swaps completed between 2004-2012

While a group of state senators have proposed making the swaps illegal, state documents only indicate that the transactions took place and do not show whether the school district or county involved lost money in the deal.

Crawford County

PENNCREST School District — $6.35 million swap, 2004

Conneaut School District— $27.34 million swap, 2005

PENNCREST School District — $9.525 million swap, 2005

Crawford Central School District — $20 million swap, 2006

Crawford Central School District — $10 million swap, 2007

Mercer County

West Middlesex School District — $14 million swap, 2005

Mercer County — $28.5 million swap, 2005

Mercer County — $28.5 million swap, 2006

West Middlesex School District — $11.2 million swap, 2006

Mercer County — $29.3 million swap, 2007

West Middlesex School District — $3.3 million swap, 2009

Mercer County — $15.6 million swap, 2011

Mercer County — $28.5 million swap, 2011

What is in an interest rate swap?

A swap is a contract between a bond issuer, such as a school district or other public entity, and an investment bank, in which the parties bet on which way interest rates will move. In theory, swaps allow government entities to enter into variable-rate debt financing in order to take advantage of low interest rates and, at the same time, hedge against the possibility of those same interest rates going up.

Critics say that swaps are just a form of gambling. How much is won or lost is determined by the size of the underlying debt, how much interest rates fluctuate and other factors.