PhillyTablet Inquirer Daily News
Mobile
Home Delivery
philly.com
email
font size
comments
1
options
 
Thursday, November 19, 2009

Don't ban all swaps, says LM schools manager - Update

I wrote yesterday about PA Auditor General Jack Wagner's plea that Pennsylvania ban interest-rate swaps because  too many towns that didn't know what they were getting into lost millions, while enriching Wall Street banks and well-connected local consultants.

NEW: Gov. Rendell "would be supportive of something that kept school districts from getting in this situation and getting ripped off," says Rendell spokesman Gary Tuma. He noted state Sen. Lisa Boscola, D-Northampton, who helped get Wagner on this bandwagon after Bethlehem squealed, plans a bill to ban local-government swaps. So would Rendell really ban swaps, after boosting them in a 2003 law? "We would have to look at the specifics." 

EARLIER: Scott Shafer, Lower Merion School District business manager, says he and his board knew what they were getting into in 2006 when they swapped the variable-rate interest from a $100 million bond issue used to build new Lower Merion and Harriton High Schools for fixed-rate interest from bank "counterparties."

"We swapped our variable-rate debt and took a 4-percent interest rate for the next 20 years. Historically, if you can lock in an under-5 percent interest rate, that's outstanding," Shafer told me.

But not compared with today's sub-1 percent "exceptional" interest rates, he added. With its swaps, Lower Merion is now paying $4 million more in yearly bond costs than it would have if the schools had gone with plain-vanilla variable-rate bonds. It would cost $11 million to get out of the swap now.

But Shafer knows rates will rise again, and he expects the board will look smart long before the bonds are paid off. "We weren't betting," he told me. "We wanted a fixed rate, and they couldn't guarantee us a fixed rate unless we went into a swap."

Shafer says Lower Merion is unusual: With a top "AAA" credit rating, its borrowing costs are lower than financially challenged city districts like Bethlehem. But he doesn't think it's right to cut Lower Merion's options because of Bethlehem's remorse. Wagner's call for a ban is "a very broad comment," Shafer concluded. -- From today's PhillyDeals column here.
Posted by Joseph N. DiStefano @ 10:41 AM  Permalink | 1 comment
Comments   
  • 0 like this / 0 don't   •   Posted 4:22 PM, 11/20/2009
    The public focus seems to be on the loss sustained today rather than a picture of a local government's history with the swaps. How has the school district done over a period of years? If three swap transactions are profitable and one is a loser, then on balance the taxpayers come out ahead. Obviously no public official should get into these tranactions w/o understanding the transaction and potential risks and benefits. Some are simple swaps of fixed rate for variable rate but others can get terribly complicated (and if you don't understand it, don't do it).
    — jmcerlane


1 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
Advertise Here