Financial advisers and school business officials are urging Pennsylvania lawmakers to avoid an outright ban on interest rate swaps for government entities.
Lawmakers have proposed prohibiting the complex financial instruments, saying they’re too risky to be allowable transactions where tax dollars are concerned.
But Nancy Winkler, Philadelphia’s treasurer, says banning swaps would minimize the city’s ability to invest efficiently.
“These are important tools that allow the city to generate savings, reduce risk, manage our investments and access the financial markets effectively,” Winkler said Monday during a hearing. “Every other major city in the United States has the authority to sue these financial instruments to reduce risk.”
Winkler added that the city’s swaps policy now includes any lessons it has learned about dealing with the transactions. She and other financial advisers would prefer to see the rules governing swaps tightened rather than a ban.
One lawmaker pointed out the Philadelphia City Council passed a resolution urging the Legislature to ban the use of swaps in the city, but Winkler noted Mayor Michael Nutter does not support the resolution.
Lucien Calhoun, whose firm serves as administrator for Delaware Valley Regional Finance Authority, says not all swaps are created equal – some are more speculative and risky than others, leading to the kinds of situations cities including Harrisburg are in.
“The train wrecks, as I mentioned earlier, have occurred when entities have used swaps to borrow money,” he said. “It’s effectively a working capital loan that would not have been permitted under the Local Government Unit Debt Act.
There is a way to shield school districts, municipal authorities, and other local government entities from the more harmful swaps, said Calhoun, and that’s to prohibit upfront payments