Auditor General Jack Wagner Urges Philadelphia School District, Delaware River Port Authority to Get Out of Swaps

By THE OFFICE OF AUDITOR GENERAL JACK WAGNER

HARRISBURG, Pa., Dec. 3, 2009 – A year after the taxpayers bailed out Wall Street, no action has been taken to curb unregulated financial derivatives and local taxpayers may be paying the price, says Pennsylvania Auditor General Jack Wagner. In particular danger are school districts and other local governments and government agencies that are betting taxpayer money on the direction of interest rates. Wagner wants officials to take aggressive defensive moves to protect the taxpayers they serve from the enormous losses possible from what he has called “gambling with public funds.”

Wagner recently found that the School District of Philadelphia has more than one billion dollars in debt tied to swaps, the highest amount of all 500 school districts in the commonwealth. “With such a large exposure due to swaps,” Wagner wrote to Superintendent Arlene Ackerman and Robert Archie, Jr., Chairman of the Philadelphia School Reform Commission, “I am deeply concerned about the potential damage to your efforts to improve the state of the district’s financial condition and academic performance.”Wagner today sent letters to leaders of both the Philadelphia School District and the Delaware River Port Authority, urging them to terminate any active swaps and to stop using them in the future.

A swap is a financial contract between two parties betting on which way interest rates will move. The party that guesses correctly gets paid and the party that guesses incorrectly must pay the other party. The amount of cash being swapped is determined by the size of the debt being financed by bonds with variable interest rates. The higher the debt, the costlier the bet.

Wagner’s recent special investigation of the use of swaps determined that 107 Pennsylvania school districts and 86 local governments had financed $14.9 billion in debt tied to interest-rate swaps, and that one school district — Bethlehem Area, in Lehigh and Northampton counties — had lost at least $10.2 million in swaps. Bethlehem Area had the second-highest amount of school district debt tied to swaps after Philadelphia, at $272 million.

Wagner said that the Delaware River Port Authority, which operates toll bridges that link southeastern Pennsylvania with New Jersey, is saddled with $240 million in financial liabilities from interest-rate swaps that date to 2000 and 2001, before he joined the DRPA board.

“DRPA gambled with taxpayer money and lost,” Wagner said, “but it’s the traveling public who will ultimately pay the cost.”

In his letters, Wagner urged the Philadelphia School District and DRPA to:
Stop using swaps and other types of exotic financial instruments from this day forward;
Immediately terminate any active swaps and refinance with conventional debt instruments;
Assess the financial consequences if they were to suffer the same negative experience with their swaps as the Bethlehem Area School District and others; and
Hire financial advisors through a competitive selection process and periodically evaluate the quality, cost, and independence of the services provided.

Wagner also has called on the General Assembly to repeal Act 23 of 2003, which permitted Pennsylvania school districts and local governments to enter into interest-rate swaps, and to expressly prohibit the use of such instruments by school districts, local governments, and municipal authorities.

“The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss,” Wagner said. “Swaps have no place in public financing and should be banned immediately.”

###

pa2010.com publishes press releases, statements and other information from campaigns and political committees. We also publish legislative releases from candidates considering higher office in 2010 and from incumbents holding those offices. E-mail releases to press@pa2010.com.