Senators Push to Eliminate Municipal Swaps

Harrisburg
Harrisburg

In a bipartisan move three senators are teaming up to get the ball rolling on swap elimination and rewrite the rules of municipal borrowing.

The legislative package by Senators John Blake (D-Lackawanna),* John Eichelberger (R-Blair), Mike Folmer (R-Lebanon), and Rob Teplitz (D-Dauphin) confronts the financial dealings and processes that had a hand in creating the situations debt-burdened cities and school districts find themselves in.

“Through our hearings, we’ve learned about the deficiencies in our current process that allowed the Harrisburg situation to occur,” said Eichelberger.

The legislation which the Senators expect most controversy are two bills that would eliminate the ability of municipalities and school districts to use qualified interest-rate management agreements, or swaps.

The way that these financial instruments are supposed to work is this: municipalities or school districts reach an agreement with a bank or other creditor in which they pay an interest rate on their borrowing which is below the market rate. Revenue is thus generated to the school district or municipality from a separate floating rate.

However, when market conditions change, cities and schools may find themselves on the hook for payments to the creditors that set up the swap. The interest rate on the debt can be far higher than the money the borrower was receiving from the variable rate. That means the deal can balloon in cost.

On top of that, these deals typically have been set up for longer time periods than the standard issuance, meaning a poorly-performing swap has lasting consequences.

“Cities and school boards all over PA are stuck with the tab and it is the taxpayer who is on the hook. It is gambling with taxpayers money,” said Teplitz.

The PA legislature legalized swaps in 2003, and only a few members remain who were a direct part of that change. Then Representative, now Senator Tim Solobay (D-Washington) co-sponsored the 2003 legislation. He said that he felt at the time, along with many others that the option should be there and it has shown that it has not been beneficial. Solobay is now a co-sponsor on bills calling for swaps elimination.

But it’s not the first time lawmakers have tried to end the practice.

In 2009, Auditor General Jack Wagner issued a report calling for legislatures to ban the use of swaps after investigating their use by the Bethlehem Area School District. Combined with their failure for Northampton County the tax base there was facing $40 to 50 billion in losses. Senator Lisa Boscola (D-Northampton) along with fellow Lehigh Valley Senator Pat Browne (R-Lehigh) tried to introduce measures banning the practice then, but were stymied and the bills never made it to committee.

“The PA School Boards Association was leading the opposition then,” said chief of staff to Senator Boscola, Steve DeFrank.

PASBA confirmed that they did lobby against the elimination of swaps in ‘09 and ‘10. Steve Robinson of PASBA said that the association does not have a position on the current bill package but their position on the use of swaps has not changed.

“We tried to offer reform measures instead of banning them outright. We believe there are many cases where swaps are beneficial. This is a tool that should be available to School Districts,” Robinson said.

PSBA’s position is that agreements should disclose the best and worst case scenarios, that a cooling off period should be mandated before the deal can be closed, and that there should be independence in monitoring these deals along with periodic investigation.

According to a growing cadre of Senators though, with so many burned municipalities it is no longer worth the risk.

*An earlier version of this post omitted Blake.

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