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For Immediate Release
Contact: Steve Halvonik 717 787-1381
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Auditor General Jack Wagner Writes To All 500 School Districts to Stop Gambling With Taxpayer Money

State’s independent fiscal watchdog says stop using interest-rate swaps

HARRISBURG, Pa., Dec. 17, 2009 – Auditor General Jack Wagner today sent a letter to every school district in Pennsylvania, urging them to refrain from using interest-rate swaps and to terminate any swaps agreements they may have.

Wagner issued the warning after his special investigation determined that 107 of 500 Pennsylvania school districts are using the risky financial instrument, which cost Bethlehem Area School District taxpayers at least $10.2 million.

Swaps are legal agreements between school districts and investment banks, that bet on which way interest rates will move. The party that guesses correctly gets paid and the party that guesses incorrectly must pay. The payout is determined by how much interest rates change and the size of the underlying debt the swap is tied to.

“Pennsylvania schools engaged in interest-rate swaps are gambling with taxpayer money,” Wagner said. “With the Pennsylvania economy still mired in the greatest recession in at least a generation, and families struggling to make ends meet, it is unconscionable that school districts would put millions of taxpayer dollars at risk.”

In theory, swaps allow school districts 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, in reality,” Wagner said, “swaps are nothing more than a form of gambling with public funds.”

According to records from the Department of Community and Economic Development, there were 626 swap filings made in Pennsylvania between October 2003 and June 2009, which related to $14.9 billion in debt. 

Wagner recently sent a letter to leaders in the General Assembly, 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.

In letters he sent today to every school district in Pennsylvania, Wagner told them that regardless of whether the legislature acts, the school districts should:

• Stop using swaps and other types of exotic financial instruments from this day forward;
• Terminate any active swaps and refinance with conventional debt instruments;
• Assess the financial consequences on the district and its taxpayers if the district were to suffer the same negative experience with its swaps as the Bethlehem Area School District and others; and
• Hire financial advisors through a competitive selection process and periodically evaluate the quality, cost, and independence of the services provided.

Some school and government officials have argued that their swaps have made money and/or that they should find an opportune time to terminate active swaps.

“I must respectfully disagree with any approach that condones gambling with public funds,” Wagner said in his letter.  “It is the taxpayers, not the public officials, who bear the losses resulting from a bad bet. Swaps have no place in public financing and must stop now.”

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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