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From the Department of the Auditor General:

Auditor General Jack Wagner today urged the General Assembly to ban municipal authorities in the state from attaching risky interest-rate swaps to new debt financed by bond issues.

At a hearing before the House Finance Committee, Wagner said that the Municipality Authorities Act should be amended to expressly prohibit authorities from entering into swaps. Wagner also repeated his call for the General Assembly to ban Pennsylvania school districts and local governments from entering into swaps agreements.

“Most Pennsylvanians would be upset if members of their school board or municipal government gambled away their hard-earned tax dollars at the local slots casino,” Wagner told the committee. “They should be just as upset if their school district or council has tied up local funds in interest-rate swaps, because these exotic financial instruments are tantamount to gambling with public money.”

Swaps are financial bets between two parties, such as a school district and an investment bank, on which way interest rates will move. The party that guesses right wins and gets paid; the party that guesses wrong loses and must pay the other party. How much money is won or lost is determined by how much interest rates fluctuate, and other factors. The bigger the swing in interest rates, the higher the potential losses.

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