Philadelphia should demand that Wall Street banks refund half a billion dollars lost or owed by city agencies on interest-rate swap contracts that were supposed to cut city borrowing costs but instead swelled budget deficits at the worst possible time, a Harrisburg-based advocacy group and its labor-union allies say.
The Pennsylvania Budget and Policy Center and the labor-backed Fight for Philly organization collected data on swaps losses from dozens of city financial filings and presented them Tuesday at a City Hall meeting attended by laid-off school employees and public-school parent activists.
Swaps and other complex financial arrangements used to be off-limits to local governments. But in the late 1990s, "the financial-services industry lobbied Washington to deregulate these instruments," center executive director Sharon Ward said. "Then they came to Harrisburg and lobbied in 2003 for legislation that removed the ban."
Swaps "were heavily marketed" by bankers who stood to profit from the sales, Ward said. Schools and local governments that bought swaps were effectively betting on the future direction of U.S. interest rates. The banks helped the governments that bought swaps borrow money at competitive rates. But the swaps required that, if market interest rates fell below certain low levels, the governments had to pay the banks the difference. When interest rates fell instead of rising, governments owed millions.
According to the center's report:
The School District of Philadelphia paid a net $161 million to Morgan Stanley, Goldman Sachs, and Wells Fargo Bank on 10 interest-rate swap contracts connected to bonds the district sold, starting in 2003.
The City of Philadelphia paid a net $34 million to Royal Bank of Canada to settle swaps connected with city general-obligation bonds, plus up to $59 million for swaps still in force. The city has paid millions more to terminate swaps contracted with JPMorgan, Citigroup, and Merrill Lynch; the center says it lacks data to estimate the net cost of those settlements.
Borrowers using the Philadelphia Authority for Industrial Development paid $33 million to JPMorgan Chase Bank and Merrill Lynch Capital Services on swaps sold in connection with a series of bond issues, and owe up to $111 million on swaps still in force.
Philadelphia International Airport paid an estimated $41 million to JPMorgan to settle swap options issued in connection with bond refinancing and owes an additional $58 million on swaps still in force.
Philadelphia water and wastewater agencies paid more than $10 million to Citigroup for swap options connected to bond refunding and owe an additional $16 million on swaps still in force.
And that's not counting swaps liabilities for the Board of City Trusts (which runs Girard College and Wills Eye Hospital), Philadelphia Gas Works, and other public agencies.
City Treasurer Nancy Winkler and school district chief financial officer Michael Masch have questioned previous swaps-loss reports, noting that the damage would be less if we considered the lower bond rates the city was able to secure with swaps contracts.
But state Auditor General Jack Wagner has called that a phantom comparison. He wants the state to investigate the contracts and the fees paid to banks, lawyers, and financial advisers who approved and supported the deals - and to restore the ban on swap sales to local governments.
Wagner's proposals went nowhere under former Gov. Ed Rendell and Gov. Corbett. So the activists have turned to City Council to demand that the banks pay the money back. Council members David Oh, Jannie Blackwell, and Maria Quiñones-Sánchez watched the presentation but were noncommittal.
I asked: Why stop with the banks? Wouldn't a real investigation also study former Mayor John F. Street, Rendell, the state boards that oversee city and school finances, and other politicians and professionals with public-finance responsibilities?
"The banks knew more than any city treasurer," Anne Gemmell, an organizer for Fight for Philly, told me. "The point is to move beyond blame" and "solve the problem" by getting the banks to "renegotiate terms more favorable to the city."
But Gloria Thomas of West Philadelphia, representing the public-school parents' group Parent Power, wasn't satisfied to let the politicians go. "You asked the right question," she told me. "They were all in this together."