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His special investigation finds 1 in 5 school districts using risky investment tool

HARRISBURG, Pa., Dec. 9 /PRNewswire-USNewswire/ -- As the General Assembly continues to work on table-games legislation, one out of five Pennsylvania school districts are gambling with taxpayer money in investment schemes that could cost taxpayers millions of dollars.

A recent special investigation by Auditor General Jack Wagner determined that 107 of 500 school districts, and 86 local governments, have tied $14.9 billion in public debt to interest-rate swaps, which are legal contracts between a bond issuer, such as a school district, and an investment bank, in which the parties bet on which way interest rates will move and other unpredictable factors.

In theory, swaps allow local governments 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. In reality, they are gambling with taxpayer money, Wagner said. His investigation last month found that the Bethlehem Area School District lost at least $10.2 million in swaps.

Wagner today sent letters to the leadership of the General Assembly; the chairs of the legislative appropriations, finance, education, and state government committees; and other interested legislators recommending they repeal Act 23 of 2003, which permitted school districts and local governments to enter into interest-rate swaps. He also recommended that the General Assembly adopt new legislation that would expressly prohibit school districts, local governments and municipal authorities from entering into swaps and other types of exotic financial instruments.

"I am very concerned about the impact of this type of toxic financial instrument on taxpayers throughout the commonwealth," Wagner said in his letter. "I hope that the General Assembly acts on our recommendations as soon as possible."

Wagner also has urged local governments and authorities to stop using swaps from this day forward; immediately terminate any active swaps and refinance with conventional debt instruments; and hire financial advisors through a competitive selection process and periodically evaluate the quality, cost, and independence of the services provided.

"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."

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the Commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts more than 5,000 audits per year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's Web site at www.auditorgen.state.pa.us.

SOURCE Pennsylvania Department of the Auditor General

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