State House Sound Bites

Capitol reporter Mary Wilson covers Pennsylvania politics and issues at the Pennsylvania state capitol.

Talk of swap ban hits skids

Written by Mary Wilson, Capitol Bureau Chief | Sep 9, 2013 9:34 PM

The road to prohibiting government use of financial instruments known as interest rate swaps may be longer than state lawmakers realized. For months - years, even - the loudest talk about interest rate swaps in Harrisburg came from the people opposed to them.

Now that an outright ban is on the table, lawmakers are hearing from financial advisors and city officials who want to hang onto the complex tools.

Lucien Calhoun, whose firm serves as administrator for Delaware Valley Regional Finance Authority, said at a hearing Monday that swaps can be more tightly governed without being banned. He acknowledged some swaps are "trainwrecks" leading to big losses, but said those can be avoided with targeted changes, like banning upfront payments to participating government entities.

"That's the inducement that gets most of the local governments involved in transactions that are abusive," said Calhoun. "They should be stopped, no question about it. Deny the money they get up front."

Several lawmakers, former board members at a school district hit hard by bad swaps, and the former state auditor general testified that interest rate swaps are still too risky.

Philadelphia Treasurer Nancy Winkler the city is sophisticated enough to police itself in that respect.

"These are important tools that allow the city to generate savings, reduce risk, manage our investments and access the financial markets effectively," Winkler said. "Every other major city in the United States has the authority to sue these financial instruments to reduce risk."

She added that the city's swaps policy now includes any lessons it has learned about dealing with the transactions, including the prohibition of upfront payments mentioned by Calhoun and other financial advisors.

Sen. Rob Teplitz (D-Dauphin), an outspoken critic of swaps and the sponsor of the bill to ban swaps in Philadelphia, pointed out that the Philadelphia City Council passed a resolution urging the Legislature to ban the use of swaps in the city. Winkler said the mayor's administration does not support the resolution.

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