Auditor General Jack Wagner Asks SEPTA to Provide Details on Debt Tied to Risky Interest-Rate Swaps

Posted by By at 14 May, at 13 : 49 PM Print

NEWS RELEASE
For Immediate Release

HARRISBURG, Pa., May 14, 2010 –Auditor General Jack Wagner reiterated his call for the Southeastern Pennsylvania Transportation Authority to provide his department with information related to its exposure to interest-rate swap agreements.

In a follow-up letter to SEPTA’s chairman, Pasquale Deon Sr., Wagner asked the transportation agency to provide his department with detailed information regarding its use of swaps, including all costs, commissions, and other fees incurred from active and terminated swaps. SEPTA failed to respond to Wagner’s first letter, sent in April, seeking this information.

“With such a large exposure due to swaps, I am deeply concerned about the potential damage to efforts to address the issue of transportation funding in the Commonwealth,” Wagner wrote to Deon.

SEPTA had three active swaps associated with $345.5 million of debt as of June 30, 2009, according to the transportation authority’s 2009 annual report. If it had to terminate all of the swaps, it would lose $52.4 million, which, Wagner noted, is equal to approximately six weeks’ worth of fare revenues.  Wagner has also identified significant public funds at risk at other transportation agencies such as the Pennsylvania Turnpike Commission and the Delaware River Port Authority.

“The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss,” Wagner said. “Swaps have no place in public financing and should be banned immediately.”

A special investigation by the Department of the Auditor General determined that 107 Pennsylvania school districts and 86 local governments had financed $14.9 billion in debt tied to interest-rate swaps, and that one school district — Bethlehem Area, in Lehigh and Northampton counties — had lost at least $10.2 million in swaps.
As a result of his investigation, Wagner has asked the General Assembly to repeal Act 23 of 2003, which permitted Pennsylvania school districts and local governments to enter into interest-rate swaps, and to expressly prohibit the use of such instruments by school districts, local governments, and municipal authorities. He also has recommended that school districts and local governments stop entering into any additional swaps agreements and to unwind any swaps agreements that they currently have in a way that best protects the interests of taxpayers.  Legislation to implement Wagner’s recommendations is pending in the General Assembly.

Wagner requested the swaps details by June 4, 2010.  “Otherwise, I will assume that SEPTA is refusing to provide the requested information and we will proceed accordingly,” he wrote.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly.  He is the Commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations.  The Department of the Auditor General conducts more than 5,000 audits per year.  To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department’s Web site at www.auditorgen.state.pa.us.

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