Risky Wall Street Swaps Costing PA Millions, Senate Considers Ban – PA Headlines 2/4 Counterpoint PA 9/24-30/2013
The Pennsylvania Senate Local Government Committee held a hearing on September 9th about Senate Bill 904, which would ban public agencies from using complex financial instruments or swaps that according to former Democratic state Auditor General Jack Wagner cost the state hundreds of millions of dollars.
In a swap, a municipality and a financial institution agree to exchange cash-flow payments. Most swaps involve a municipality issuing a variable rate debt and then entering into a swap with a bank, which makes a variable rate payment to the municipality while the municipality makes a fixed-rate payment to the bank. However, if interest rates fall, the municipality could see losses.
âSwaps are nothing more than a form of gambling with public funds. The party that guesses right wins and gets paid; the party that guesses wrong loses and must pay the other party,â Wagner said.
And when the party that guesses wrong and loses massive sums of money is a government entity it is the tax-payers that take the hit.
…Wagner told [the] Senate hearing that an audit by his agency found the Pennsylvania Turnpike Commission lost $109 million between 1998 and 2011 because of interest rate âswapsâÂ … A 2012 audit of the Southeastern Pennsylvania Transportation Authority concluded that swaps cost taxpayers and transit fare payers $41 million more than if SEPTA had financed debt in 1999 with conventional fixed-rate bonds … In addition, the Delaware River Port Authority collected $45 million in up-front payments on swaps in 2000 and 2001, but later paid out $101 million in termination fees and additional interest to terminate several of them. …
âPublic money that could be funding transportation has been lost through swaps, and additional tax dollars are seriously at risk,â Wagner said. âInstead of sending our money to Wall Street, we should be investing it in our critical transportation here in Pennsylvania.â [He] endorsed the specific bill before the Local Government Committee to prohibit local governments, school districts and municipal authorities from using swaps.
While the legislation had its detractors on the committee, there was at least one outspoken progessive championing it: state Senator Rob Teplitz, Democrat from the 15th District. The Standard Speaker quoted Senator Teplitz saying, âI still believe an outright ban is appropriate … No one could assure me there was any way to eliminate the risk.â Emily Previti of Penn Live reported that Senator Teplitz said, âProfits [from swaps] are privatized âŚ but risks are socialized and the taxpayers absorb the risks.â
Taxpayers absorb the risks and itâs the taxpayersâ money that is lost when the government loses money on risky Wall Street gambling schemes. Itâs great for people on Wall Street but terrible for the people of Pennsylvania. A politicianâs stance on this issue is a great insight into which of those two things theyâre more worried about protecting.