Pennsylvania casts sunshine on muni swaps

June 1, 2011

When it comes to municipal derivatives, Wall Street has brutalized the poor Keystone State. Though many municipalities, such as Alabama’s Jefferson County, have suffered bigger losses from muni swaps, Pennsylvania is like a cancer cluster of bad derivative deals. State Auditor General Jack Wagner wants to do something about that, and last month he announced that Pennsylvania is creating a public registry of local government swaps. I hope this is a trend for other states. From the office of the Auditor General:

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 [Department of Community and Economic Development] 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.

Why is it important to create transparency for these municipal swaps? From the Auditor General again (emphasis mine):

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.

It’s astonishing to think that 107 local school districts entered into swaps. School-board members usually have the most minimal grasp of financial markets. What happened to the Bethlehem Area School District? Bloomberg reported on its difficulties in October 2008:

In the last week of September, the rate on $55 million of floating-rate bonds issued by the school district in 2007 jumped to 8.5 percent compared with 1.9 percent at the beginning of the month. Two swaps with JPMorgan on the bonds added another 6.51 percent, making the district’s total rate on the debt 15 percent. The overall rate has since declined to 9 percent.

The transactions have also drawn criticism from some taxpayers who turned out for the local school board meeting earlier this month, when the problems were discussed.

‘The people who sold these came to us, not to assist us, but because they saw a way, with our money, to make money for themselves and we fell for it,” said Stephen Antalics, 79. “Who’s going to pick up the expense? It’s going to come out of taxpayers’ pockets. The people who created this will walk away Scot free.”

The SEC’s new municipal-adviser registration process will bring those parties into the sunlight more. Wall Street banks have been chastened a little by fines they have paid for selling these products.

Pennsylvania can be thankful in one regard: unlike Jefferson County, Alabama, the state does not have a massive hidden muni swap liability that threatens to bankrupt it. Hopefully the new PA muni swap repository won’t uncover one.

One comment

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[…] be disadvantaged. Generally, it’s the small issuers that are most often preyed upon — see my post from yesterday on Pennsylvania’s muni swaps […]

Posted by Muni Sweeps: Muni CDS | MuniLand | Report as abusive

Wagner’s study was a disgrace, politically motivated instead of watching out for the welfare of Pennsylvanians.

I sent a letter to Mr. Wagner at the time his “study” was released, refuting his claims and pointing out that had the Bethlehem S.D. been allowed to continue with the swap, it could have been the most profitable transaction they could have entered into.

This is a copy of my letter. r-to-Pa-Auditor-General-Jack-Wagner

John Black

Posted by jblack010 | Report as abusive

[…] these products to sophisticated and unsophisticated investors across the globe. I wrote about the efforts of the Pennsylvania Auditor General Jack Wagner to develop a database of swaps for local governments. This effort should be lauded and hopefully […]

Posted by Muni sweeps: Derivatives transparency for dummies | MuniLand | Report as abusive