February 9, 2010, Auditor General Jack Wagner commended the Erie School District for terminating its interest rate swap agreement, which netted the school district almost $2 million.
Wagner said the school district made the right choice in deciding to stop gambling with taxpayer dollars, and he urged every school district and municipality involved in swaps to terminate those risky agreements.
I applaud Erie School District Superintendent Jim Barker and the school board for their decision to get out of this risky financial agreement and I recommend that other school districts follow this action because interest rate swaps have no place in local government Wagner said.
Interest rate swaps are legal contracts between a school district and an investment bank that bet on which way interesr rates will move. The party that guesses correctly gets paid; the party that guesses incorrectly must pay the other party. The payments are determined by the size of debt bonds financed with variable interest rates.
Wagner recently notified Pennsylvania school districts to avoid interest rate swaps, and to terminate any contracts they might have, after his special investigation determined that swaps approved by the Bethlehem Area School District cost taxpayers at least $10.2 million. The investigation also found that 107 of 500 school districts and 86 municipal governments had $14.9 billion in public debt tied to interest rate swaps.
Officials in the Erie School District heeded Wagner's advice to get out of swaps. The Erie School Board authorized termination of a 2006 swap transaction with PNC Bank at a special meeting Monday. The decision will net the district an estimated $1.95 million after fees. The earnings will be used to pay down the debt on $37 million in construction bonds refinanced by the district's original swap in 2003.
Erie joins three other school districts: Central Dauphin, Nazareth Area, and New Hope-Solebury School Districts, which recently terminated interest rate swap agreements.
While the Erie School District made money terminating its swap agreement, the use of swaps by other Erie public entities have lost taxpayer money, when the Erie Sewer Authority , which issues bonds to fund the municipal sewer system, lost $878,000 in a bond-related swap it entered into in 2005.
Wagner said interest rate swaps are tantamount to gambling with taxpayer money. I commend these school officials for moving swiftly to protect the financial interests of their taxpayers, because the profit the school district earned could just as easily have been a loss had interest rates moved suddenly in the wrong direction. For the sake of Pennsylvania taxpayers, I call on the other school districts that have entered into similar swaps contracts to get out of these risky agreements as soon as they possibly can.
Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. More infromation about his fiscal watchdog activities can be found at www.auditorgen.state.pa.us.