Study charts use of 'swap' deals by Pa. schools

AP News
Posted: Nov 19, 2009 10:46 AM

Auditor General Jack Wagner said about one-fifth of Pennsylvania's school districts have recently been involved with interest rate "swaps," a practice he said the Legislature should ban.

Wagner said that 107 school districts and 86 other local governmental bodies reported having entered into swap agreements over a recent six-year period.

Swaps theoretically provide a hedge against large increases in certain interest rates, but Wagner likened the complex financial deals to gambling and called them "toxic products" that should not involve public funds. He said local governments and school districts should terminate any such swaps currently in place and pursue other forms of financing.

"The risk outweighs the benefit," Wagner said Wednesday. "It's not a minor risk, it's a significant risk and public officials are no match for investment bankers."

The study of qualified interest rate management agreements _ or swaps _ was prompted by a $12.3 million payment to an investment bank by the Bethlehem Area School District earlier this year.

Wagner said that, in two deals, the district was hit with excessive fees and other payments and was subject to what he described as deceptive marketing tactics. In Bethlehem's case, the use of swaps cost taxpayers $15.5 million more than if the district had simply not used them at all, Wagner said.

Wagner said local governments should use a competitive process to pick financial advisers and then monitor their performance.

Dave Davare, director of research services for the Pennsylvania School Boards Association, agreed with Wagner that swaps carry substantial risk and that districts should get independent financial advice.

"By independent, I mean the person that they hire works for the district and is not making any other revenue on this transaction from anybody else involved in the transaction," Davare said.

But he said there are plenty of examples of swaps helping Pennsylvania school districts.

"For every district that you can point at like a Bethlehem ... you can turn around and point out a district that has been successful with it," Davare said. "This is not a situation where every district has lost money. Some districts have lost money primarily because they're trying to get out of them too early."