New Castle News

Closer Look

May 11, 2013

Bill would ban public use of interest swaps

HARRISBURG — Sen. Rob Teplitz, D-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 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 with 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 from happening 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 cost the Bethlehem School District more than $10 million.

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

In conversations with financial analysts, Folmer said, 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 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.

(Email: jfinnerty@cnhi.com)

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