Skip to content
Link copied to clipboard

Pa. auditor urges end to interest-rate swaps

Pennsylvania Auditor General Jack Wagner urged the Delaware River Port Authority yesterday to ban the use of exotic financial instruments known as "interest-rate swaps."

Pennsylvania Auditor General Jack Wagner urged the Delaware River Port Authority yesterday to ban the use of exotic financial instruments known as "interest-rate swaps."

Wagner, who is also a DRPA board member, said in a letter to chief executive John Matheussen that the board should adopt a resolution at next week's meeting to ban swaps.

"In reality, swaps are nothing more than a form of gambling with public funds," wrote Wagner, who is seeking the Democratic nomination for Pennsylvania governor. "I am very concerned about the impact of this toxic product on the taxpayers and toll- and fare-paying travelers of both Pennsylvania and New Jersey."

Interest-rate swaps made in 2000 and 2001 provided DRPA with $45 million, but spawned $242 million in liabilities that are beginning to come due.

An interest-rate swap is an agreement between an agency such as DRPA and an investment bank to exchange one stream of interest payments for another over a set period. They usually involve the exchange of a fixed-rate payment for a variable-rate payment.

Swaps were attractive when interest rates on variable-rate bonds and notes were lower than those on fixed-rate bonds and notes. They allowed public agencies to take advantage of the lower rates while, in theory, providing a hedge against large increases in those rates.

However, the collapse of financial markets exposed the agencies to unanticipated risks and millions of dollars in losses.

DRPA has paid $13 million to settle one swap contract and will pay about $40 million to terminate another, chief financial officer John Hanson said last month.

The board voted last month to refinance $528 million of its $1.15 billion in debt. That was designed to limit costs created by swap deals made nearly a decade ago to fund controversial economic-development projects such as sports stadiums, museums, and concert halls.

Current DRPA officials and board members have said they don't intend to enter into new swap deals, but Wagner wrote that "such assurances do not go far enough."

He urged the board to resolve Wednesday to stop using swaps, to terminate any active swaps and refinance them with conventional debt instruments, and to hire its financial advisers through a competitive process.

Matheussen said yesterday that "we take very seriously" Wagner's suggestion, but he was not ready to say what, if anything, he would recommend the board do.

"We'll be looking at it very carefully," he said. "Something of this magnitude requires careful study."

Wagner, who recently investigated swap deals at school districts and local governments in Pennsylvania, sent a similar letter yesterday to the Philadelphia School District. He said the district had more than $1 billion in debt tied to swaps, the most of any district in the state.

"With such a large exposure due to swaps," Wagner wrote to Superintendent Arlene Ackerman and Robert Archie Jr., chairman of the Philadelphia School Reform Commission, "I am deeply concerned about the potential damage to your efforts to improve the state of the district's financial condition and academic performance."

He urged district leaders to terminate active swaps and not use them in the future.