Philadelphia Swaps Cost Taxpayers $331M: Report
Philadelphia Swaps Cost Taxpayers $331 Million
Matt Slocum/AP
Parents, teachers and other community members participate in a candlelight vigil outside the Chester-Upland School District administration building in Chester, Pa.
Parents, teachers and other community members participate in a candlelight vigil outside the Chester-Upland School District administration building in Chester, Pa. Photographer: Matt Slocum/AP
Philadelphia and its school district have lost a combined $331 million on interest-rate derivatives known as swaps, and the city stands to lose $244 million more, the Pennsylvania Budget and Policy Center said in a report.
Losses came in the form of net interest payments and cancellation fees related to derivatives negotiated with banks that included Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. (GS), the Harrisburg-based nonprofit organization said today in the report. It examined financial audits, bond documents, and historical interest rates of variable benchmarks.
Cancellations and payments from the school system, the eighth-largest in the U.S., show losses of $161 million, while the city, the nation’s fifth-largest by population, lost $170 million through July 2011, according to the report. The district closed a $629 million current-year budget gap by cutting teachers and programs. The group said banks that profited from the swaps should help schoolchildren and taxpayers.
“Paying back termination fees to the school district as an act of goodwill could put students back in music and gifted programs,” the organization said in the report. The nonprofit group, started in 2005, focuses on policies as they affect working families, according to its website.
Alleviating Cuts
“Renegotiating active swaps with the city to more equitable terms could alleviate future cuts to the city budget,” the group said in the report. “It’s only fair.”
Rob Dubow, Philadelphia’s finance director, Mark McDonald, a city spokesman, and Fernando Gallard, a school district spokesman, didn’t immediately respond to telephone calls seeking comment on the report. Michael Duvally, a spokesman for Goldman Sachs, and Mary Claire Delaney, a Morgan Stanley (MS) spokeswoman, declined to comment. Mary Eshet, a Wells Fargo spokeswoman, couldn’t immediately comment on the report.
The city continues to make “excessive payments” to counterparties on active swap agreements, according to the report. It estimates additional losses of $244 million on the assumption that the Securities Industry and Financial Markets Association Municipal Swap Index rate and a London interbank offered rate, or Libor (YCMM0021), won’t rise above 0.3 percent.
Libor Index
The report didn’t identify which Libor index was used in the deals. The one-month rate dropped as low as 0.185 percent on July 1, according to data compiled by Bloomberg, and since then has risen to 0.281 percent today.
Interest-rate swaps are derivative transactions in which two parties agree to trade interest payments on a set amount of debt, letting one of the parties create a fixed-rate payment on variable-rate debt.
Before the city’s school system began to cancel the swaps in 2009, its billion-dollar stake in the contracts was the largest among 107 Pennsylvania districts that entered the transactions, state Auditor General Jack Wagner reported in November 2009.
Wagner has urged lawmakers in Pennsylvania, the sixth- largest U.S. state by population, to repeal 2003 legislation that allowed school districts and other local governments to trade in swaps. He called the deals “impenetrably complex transactions that, quite simply, amount to gambling with public money.”
To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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