Sunday, September 21, 2014
Inquirer Daily News

Senator: Ban swaps, hire prosecutor for Harrisburg bond deals

Mike Folmer, R-Leb., targets Harrisburg incinerator deals

Senator: Ban swaps, hire prosecutor for Harrisburg bond deals

Pennsylvania state Sen. Mike Folmer (R-Lebanon: his district stretches all the way from north of Harrisburg to Elverson, Chester County) and colleagues have drafted a bill setting up a special prosecutor's office, which his office says would "thoroughly investigate" a series of dubious Harrisburg Authority trash incinerator refinancings that left the state's capital city more than $300 million in debt and unable to pay its bills.

The prosecutor would "determine if criminal proceedings are warranted;" along with other legislation banning interest-rate swaps, which Philadelphia, Harrisburg and other communities have used to try to reduce their borrowing costs; and regulating some municipal borrowing more closely.

The move comes a year after a Harrisburg Authority audit showed the city and its paid financial advisors, lawyers and other paid professionals were unable to justify the city's borrowing. Read the audit from this link.

Folmer and a bipartisan group of Senators (corrected) in a December letter urged on Dauphin County District Attorney Edward M. Marsico Jr. to consider whether crimes were committed in the Harrisburg financing, and urged to refer the matter to state or federal prosecutors if warranted.

One bill, Senate 292, in its draft form, sets up rules for state Attorney General Kathleen Kane to request Gov. Corbett's general counsel to appoint a "special investigative counsel" to determine if any crime or violation of the state election and public employee ethics laws has taken place. The language in the bill does not limit the counsel's focus to debt transactions or to Harrisburg. Folmer's cosponsors include Rafferty, Vance, Vulakovich.

Other bills in Folmer's package includes SB 293, which would ban interest-rate swaps transactions, which critics like former state auditor Jack Wagner say have enriched Wall Street banks and their clients at the expense of Pennsylvania cities, counties, public authorities and school districts, including Harrisburg. Cosponsors include Teplitz, Rafferty, Vulakovich, Pileggi, Eichelberger.

Additional bills in the proposed package, which Folmer and his allies drafted after Senate hearings into Harrisburg's financial problems last fall and after talking to ex-Harrisburg receiver David Unkovic, who resigned after realizing Gov. Corbett's allies were undercutting his attempts to cut the city's losses, include: 

SB 294, which would strengthen the state Department of Community and Economic Development's oversight of supposedly "self-liquidating" debt-funded projects, like the Harrisburg incinerator; cosponsors include the 293 cosponsors plus Waugh.

SB 295, which would make lying about "self-liquidating" public debt projects a criminal offense; sponsors same as 294, minus Pileggi.

SB 296, which would require "justifications for water and sewer rates." Harrisburg's former state-appointed receiver, David Unkovic, found the city had been wrongly overcharging neighboring towns for water services to help cover its deficit. Sponsors same as 295.

 Re swaps: Under legislation expanded by the General Assembly and previous Gov. Ed Rendell, dozens of Pennsylvania communities, including Philadelphia, its school district, the Delaware River Port Authority, Harrisburg, the Bethlehem School District, and many smaller borrowers, entered into interest-rate swap contracts with JPMorgan, Goldman Sachs, Wells Fargo, Credit Suisse and other banks.

The swaps were supposed to allow the governments to borrow at lower rates, while protecting them against the possibility of rising interest rates.

But when U.S. interest rates fell to near-record levels and stayed low, savings evaporated, and many of the borrowers have ended up paying millions to the banks and their clients who bet on lower interest rates, instead of collecting net savings.

Local finance officials in Philadelphia have generally opposed a ban, arguing that swaps can save taxpayers money. Wall Street banks also oppose a ban, though some banks have stopped swelling swaps due to bad publicity and taxpayer complaints.

Unkovic applauded the proposals. "If these bills are passed, they will prevent local governments and school districts across the state from getting into the debt trouble that has plagued Harrisburg.  The bills eliminate swaps and provide vigorous state review of the more risky types of debt.  These improvements are needed to protect Pennsylvania's taxpayers."

 

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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