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Auditor General Jack Wagner Says Pennsylvania Turnpike Commission has $2.23 Billion in Debt Tied to Swaps
Urges commission to end risky contracts and stop gambling with public money
HARRISBURG, Pa., April 9, 2010 – Pennsylvania Auditor General Jack Wagner today said that a recent review by his department found that the Pennsylvania Turnpike Commission has more than $2.23 billion in debt tied to 26 active interest-rate swaps.
If the Turnpike Commission had to terminate all of the swaps, it would lose $145.7 million, according to Wagner’s review of the commission’s most recent financial report, for the fiscal years ended May 31, 2009 and 2008. This equates to almost three months worth of turnpike toll revenues or, alternatively, about 30 percent of the annual revenues that had been projected by the proposed tolling of Interstate 80, which was rejected by the federal government this week.
The Service Employees International Union recently issued its own report estimating the Turnpike Commission’s annual swap payments to investment banks to be $26.4 million -- equal to about two weeks of turnpike toll revenues, said Wagner.
Wagner has sent a letter to Joseph Brimmeier, the Pennsylvania Turnpike Commission’s chief executive, recommending that the commission stop using these risky financial instruments.
“Swaps are tantamount to gambling with taxpayer money,” Wagner said, “and they have no place in the public sector. “With drivers already paying higher tolls mandated under Act 44, the Turnpike Commission must do all that it can to show Pennsylvanians that it is handling money wisely.”
A swap is a financial contract between two parties betting on which way interest rates will move. The party that guesses correctly gets paid and the party that guesses incorrectly must pay the other party. The amount of cash being swapped is determined by the amount of underlying public debt financed with variable-interest rate bonds “hedged” with swaps, how much the variable rates change, and other factors. The higher the debt, the costlier the bet.
As a result of his investigation, Wagner has asked the General Assembly to repeal Act 23 of 2003, which permitted Pennsylvania school districts and local governments to enter into interest-rate swaps, and to expressly prohibit the use of such instruments by school districts, local governments, and municipal authorities. He also has recommended that school districts and local governments stop entering into any additional swaps agreements and to unwind any swaps agreements that they currently have in a way that best protects the interests of taxpayers.
“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.”
In his letter to Brimmeier, Wagner urged the Turnpike Commission to stop using swaps, conduct its own financial assessment to determine the financial impact of its swaps, and hire financial advisers through a competitive selection process. He also asked Brimmeier to provide detailed information about the Turnpike Commission’s swaps by April 19.
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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