A 2003 law allowed Pennsylvania’s local governments and schools to enter into risky financing deals called swaps. Now that there have been enough disaster stories, with swaps leading to additional debt, state lawmakers are wondering if the law needs changing.
An interest rate swap is a complicated bet that can provide upfront revenue, hence the attraction for municipalities and school districts.
Steven Goldfield, a bond lawyer with the Public Resources Advisory Group, says swaps are a good tool when used properly. But he says that often requires being large enough to have a whole department that manages debt and can understand the complex agreements.
“I don’t want to make a blanket statement that no municipalities can handle this but this is — it’s like a loaded gun. It can protect you, but you’ve got to be really careful, and really trustworthy, and it could go off,” he said. “And when it does, it could be really expensive.”
Some say the best way to protect municipalities and schools entering into swaps is to build protections into the contracts with the financial advisers involved.
That would protect the smaller entities from getting burned, and still allow more sophisticated municipalities and school districts to use swaps to their financial advantage.