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State Rep. Gordon Denlinger, a Narvon Republican who is one of only a few certified public accountants in the Legislature, said he plans to introduce the ban soon because of the risks the complex financial deals pose to taxpayers.
"The concern is that local municipalities and school districts can be influenced by financial markets to enter into arrangements that sound good, but which can carry significant taxpayer risk if the economic situation changes," he said.
Denlinger will draw heavily from state Auditor General Jack Wagner's critical report on swaps released earlier this week. Wagner likened swaps to gambling and called them "toxic products" that should not involve public funds.
READ: The Auditor General's report on interest-rate 'swaps'
"The risk outweighs the benefit," Wagner said, adding that schools and local governments should terminate any such swaps currently in place and pursue other forms of financing.
"It's not a minor risk; it's a significant risk and public officials are no match for investment bankers," he said.
Wagner said that 107 school districts and 86 other local governmental bodies reported having entered into swap agreements over a recent six-year period. Swaps theoretically provide a hedge against large increases in certain interest rates.
The auditor general's report identified seven local school districts and three municipalities that entered into swap agreements between October 2003 and June of this year. Many have since terminated them.
They are Lampeter-Strasburg, Manheim Central, Manheim Township, Octorara, Penn Manor, Pequea Valley and Solanco school districts; and Lancaster city, Lancaster County and Millersville Borough.
Some of those entities made money. Others lost.
In April, Lancaster City Council agreed to pay a $3.9 million fee to terminate a bond-swap-option deal with Wachovia Bank in favor of new, fixed-rate bonds, according to newspaper records.
Pequea Valley School District, though, netted $190,000 in a swap on a $16 million bond issue for Paradise Elementary School. The swap went into effect Aug. 1, 2007, and the district terminated the swap Dec. 4 the same year, according to newspaper records.
And Solanco swapped interest rates on a $15.43 million bond issue and netted $404,385, according to newspaper records.
Denlinger's proposal would allow entities currently engaged in swaps to remain in the agreements, but provide a mechanism by which they can terminate them without putting taxpayers at risk.
"I don't think there's a desire to penalize districts that are currently benefiting," he said. "But going forward, I agree with Auditor General Wagner that we need to put a ban in place."
A similar bill was introduced in the House earlier this year. Denlinger, who co-sponsored that measure, said it does not adequately address some of the complexities of how school districts should exit their agreements.
That bill, authored by Republican state Rep. Mario M. Scavello of Monroe County, was referred to the House Finance Committee, where it remains.
The auditor general's study of swaps — or qualified interest rate management agreements — was prompted by a $12.3 million payment to an investment bank by the Bethlehem Area School District earlier this year.
Wagner said that, in two deals, the district was hit with excessive fees and other payments and was subject to what he described as deceptive marketing tactics. In Bethlehem's case, the use of swaps cost taxpayers $15.5 million more than if the district had simply not used them at all, Wagner said.
(This article contains information from The Associated Press.)
