By Melissa Daniels | PA Independent
HARRISBURG — Former state Auditor General Jack Wagner had a bone to pick with interest rate swaps. He cited them costing millions of dollars in school districts, at the Pennsylvania Turnpike Commission, and in public transit.
Wagner called them “gambling with public money,” and he urged agencies to avoid them. He even called for a ban.
Pennsylvania’s new Auditor General Eugene DePasquale doesn’t have quite the same strong words about swaps.
His comments to the Pennsylvania Press Club Monday indicate the former state legislator hopes to educate school districts about aggressive financing.
An interest rate swap is a type of financial tool called a derivative, involving hedging against future interest rate changes on existing bond agreements. If rates move in the opposite direction, it can cost millions, as can buying out of the deal.
School board members are often volunteers with jobs in other industries and may not be aware of what the financial deals can lead to, DePasquale said.
“They’re asked to make major, major, major financial decisions that impact local taxpayer and the students they’re meant to serve without the expertise to deal with it,” DePasquale said.
So when an outside company or financial consultant suggests a swap deal on a bond issue as a way to potentially raise more money, school board members might vote yes out of necessity, DePasquale explained.
“Sometimes they fear that ‘no’ will lead to a building crumbling,” DePasquale said.
Critics like Wagner say swaps rely on too much speculation about the future of the markets.
DePasquale said he doesn’t see himself weighing in on the discussion about swaps should be banned. But, he said he hopes his audits can provide a platform for more education on the topic.
“Why did those particular decisions fail? What were the common denominators, and what are the tools we can give school districts so they don’t make those same mistakes again?” DePasquale said.
Banning swaps for some public agencies is one proposal that came out of a Senate Local Government Committee meeting last year examining the city of Harrisburg’s finances related to an incinerator project, which includes millions of debt in swap deals.
DePasquale said his office would not likely end up weighing in on what municipalities like Harrisburg do about swaps, as audits only involve municipalities when they get state money. And since municipalities have a different management structure than school districts, the decisions are entered in different situations, DePasquale said.
“If we come up with guiding principles for school districts, hopefully those could also be applied to municipalities, but I can’t sit here and tell you they’re in the same situation day in and day out,” he said.