Philadelphia Derivatives Show Danger of Failure to Rein in Wall Street

Wagner continues call to ban swaps

HARRISBURG, Pa., April 27 /PRNewswire-USNewswire/ -- With financial reform taking center stage in the national spotlight, Auditor General Jack Wagner continues to advocate for similar reforms in Pennsylvania related to risky debt financing schemes known as "swaps."

"We continue to find examples of hard-earned taxpayer dollars going to Wall Street," Wagner said.  "Money that should be invested in students, classrooms, and fixing infrastructure in Pennsylvania is instead lining pockets on Wall Street.  State and local government must stop gambling with public money.  I applaud President Obama for bringing financial reform to the forefront of the national agenda."

The true extent of potential losses to taxpayers remains unknown, but could be catastrophic.  For example, all Pennsylvania taxpayers are exposed to enormous liabilities from swaps entered into by public entities in Philadelphia alone, according to recent financial reports:

• City of Philadelphia – 6 active swaps with a net "negative fair value" (the cost if the swaps were terminated as of the date of the financial report) of $122.6 million; swaps related to $1.25 billion in total debt 
• School District of Philadelphia – 12 active swaps with a net negative fair value of $124.7 million; swaps related to $682.6 million in debt
• SEPTA – 3 active swaps with a net negative fair value of $52.4 million; swaps related to $345.5 million in debt
• Philadelphia Authority for Industrial Development – 3 active swaps with a net negative fair value of $27.7 million; swaps related to $588.2 million in debt
• Philadelphia Intergovernmental Cooperation Authority – 4 active swaps with a net negative fair value of $45.3 million; swaps related to $253.1 million in debt

Wagner has sounded the alarm about swaps for months.  A 2009 special investigation conducted by the Department of the Auditor General found that 107 school districts and 86 local governments had financed $14.9 billion in debt tied to interest-rate swaps.  This debt equals an amount that is more than half of the commonwealth's budget.

The Delaware River Port Authority is facing $200 million in contingent liabilities from swaps that date back to 2000 and 2001.  The agency has already paid out $65 million to terminate several of those swaps.  In December, the DRPA Board unanimously approved a resolution introduced by Wagner, an ex-officio member, to stop using swaps and unwind out of its current swap agreements.  Wagner was not a member of the board when it entered into its swaps.

"These deals may appear attractive in the short term, but lead to catastrophic long-term liabilities which are dumped on the plate of the next generation of board members," said Wagner. "That is both unwise and unfair, which is why they have no place in public finance."

Most recently, Wagner found that the Pennsylvania Turnpike Commission had more than $2.23 billion in debt tied to 26 active interest-rate swaps, according to its most recent financial statements.  If the Turnpike Commission had to terminate all of those swaps, it would lose $145.7 million, which is equivalent to almost three months of turnpike toll revenues.

Wagner continues to urge public entities to stop using swaps, terminate their active swap agreements, conduct their own financial assessment to determine the financial impact of their swaps, and hire financial advisers through a competitive selection process.

"There is overwhelming evidence of how dangerous these financial schemes truly are," Wagner said.  "Swaps have no place in the public sector.  I urge Pennsylvania taxpayers to join the call to ban these toxic instruments."

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