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Auditor General Jack Wagner Asks DCED To Strengthen Oversight of Interest-Rate Swaps
HARRISBURG, Pa., May 10, 2010 –Auditor General Jack Wagner today asked the Department of Community and Economic Development to strengthen its oversight of school districts’ and local municipalities’ interest-rate swaps agreements to make the cost of these risky transactions more open and transparent to taxpayers.
In a letter to DCED Secretary George Cornelius, Wagner asked the department to require all local governments, municipal authorities, and agencies of state government to file their swap agreements upon execution and to update the status and financial results of those swaps every three months. Taxpayers would then know how much was paid in fees and commissions for each swap, how much the swap costs the public entity each month, how much money the swap has lost, and how much could be lost under the worst case scenario, Wagner said.
“Collecting this type of information would provide additional accountability at all levels of government in the short term while we work to ban the use of swaps in the commonwealth,” Wagner said.
Under current law, a local government unit must simply file with DCED a copy of each swap agreement, the interest-rate management plan, and a statement of how the swap was awarded (by public sale, by private sale by negotiation, or by private sale by invitation). Municipal authorities are not required to file any information about their swaps.
A special investigation by Wagner last year found that 107 school districts and 86 local governments had $14.9 billion in public debt tied to swaps. He found that Bethlehem Area School District in particular lost at least $10.2 million in taxpayers’ money through swaps.
A swap is a contract between a bond issuer, such as a school district or other public entity, and an investment bank, in which the parties bet on which way interest rates will move. In theory, swaps allow government entities 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.
However, as Wagner has explained, swaps are actually 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. How much is won or lost is determined by the size of the underlying debt, how much interest rates fluctuate, and other factors.
Wagner has called on the General Assembly to prohibit swaps for school districts, other local governments, and municipal authorities and require competitive selection and regular oversight of their financial advisors. Bills have been introduced in both chambers to implement Wagner’s recommendations.
Regardless of whether or not the General Assembly takes action, Wagner has urged local governments and school districts to stop using swaps, terminate their active swap agreements, determine the financial impact of their swaps, and hire financial advisers through a competitive selection process and periodically review 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.
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