Interest rate swaps may be banned in Pa. public sector

Interest rate swaps are going under the microscope at an upcoming Pennsylvania Senate hearing.

 

The complex financial deals were legalized for Pennsylvania local governments about a decade ago, but critics say they are gambles unfit for publicly funded entities.

A bipartisan group of lawmakers is moving to ban the agreements not just in local governments, but in the city of Philadelphia as well.

State Sen. Rob Teplitz, D-Dauphin, said he expects pushback from Philadelphia, which has been able to use swaps since before they were legalized for local governments in 2003.

“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,” he said. “I disagree, and I can point to a number of examples where large, sophisticated entities have lost money on swaps.”

The city’s dalliances with interest rate swaps have resulted in higher costs due to the credit crisis of 2007, and its treasurer said the souring swaps contributed to a borrowing cost that could grow by as much as $186 million.

The state’s former auditor general has pointed to swaps as the reason for multimillion-dollar losses at the Pennsylvania Turnpike Commission, school districts, and Harrisburg.