A bipartisan group of state senators is trying to rid Pennsylvania of the use of complex financial agreements known as interest rate swaps.
Interest rate swaps have been maligned in recent years as the unnecessary bringer of woe, as governments saw cash cows turn to dollar drags when they were blindsided by the 2007 credit crisis, and then the recession of 2008. The instruments were illegal for local government entities across the commonwealth until a 2003 law signed by former Democratic Gov. Ed Rendell.
"There have been examples of where it has succeeded, but you only need to get it wrong once before taxpayers are on the hook for a bad decision or bad risk," said Fred Sembach, chief of staff for Sen. Mike Folmer (R-Lebanon).
Folmer is sponsoring a measure to eliminate the use of swaps among government entities and municipal authorities.
State officials have pointed to souring swaps as the reason for millions of dollars in losses among school districts, the Pennsylvania Turnpike Commission and the commonwealth's capital city. For the past several years, the former Democratic state auditor general, Jack Wagner, has been urging tighter regulation of swaps, and elimination of their use by the state Legislature. Wagner will be the first to testify at a Monday hearing on bills to ban swaps in the commonwealth.
Supporters, however, call swaps useful tools that can be properly executed with the right financial expertise. Lawmakers expect to get some push-back from Philadelphia, which has been using swaps since before 2003, when they were legalized expressly for other local governments.
"The city of Philadelphia believes that it is large enough and sophisticated enough that it should be permitted to use swaps even if they're banned for local governments," said Sen. Rob Teplitz (D-Dauphin), sponsor of a separate proposal singling out, and banning, Philadelphia's use of swaps.
Even so, Philadelphia's treasurer has said swaps have contributed to borrowing costs ballooning by as much as $186 million.
"For the private sector, they may be perfectly appropriate," Teplitz said, "but they're dangerous for the public sector, for our tax dollars."
