HARRISBURG -- Former Auditor General Jack Wagner reiterated a call to end interest-rate swaps among public entities, such as cities and school districts, calling the deals risky financial instruments that have no place in the municipal sector.
Mr. Wagner was testifying Monday before the Senate's Local Government Committee, which is considering several bills regarding municipal debt and the use of interest-rate swaps and other financial instruments.
The legislation derives in part from hearings held by the same committee last year on the distressed city of Harrisburg's incinerator project, which saddled the capital with millions in debt.
Act 23 of 2003 authorized local governments to enter into "qualified interest-rate management agreements," or swaps.
Mr. Wagner repeatedly has called for a ban on such deals, which essentially are contracts between a bond issuer -- such as a school district or city -- and an investment bank, in which the parties bet on which way interest rates will move.
"Swaps are nothing more than a form of gambling with public funds," Mr. Wagner said Monday.
He said even large, seemingly sophisticated entities such as the Delaware River Port Authority and Pennsylvania Turnpike Commission have lost money on such deals.
However, such swaps are key for the city of Philadelphia, testified Nancy Winkler, the city's treasurer. The city "brings the appropriate degree of sophistication and prudence" to such transactions, she said, and getting rid of the deals would put Philadelphia at a disadvantage compared to other large cities.
She refuted a study by the Pennsylvania Budget and Policy Center from 2012, which found the city and Philadelphia Schools lost $331 million in net interest payments and cancellation fees relating to swaps.
"I would urge you all to set [the study] aside," she said, saying she disagreed with the study's methodology.
Ms. Winkler acknowledged that such deals are not without risk but said with the right policies and managers, the city can have a well-managed swap portfolio that lowers its borrowing costs.
Mr. Wagner said he does not oppose swap deals in the private sector, as private investors are free to take on such risks if they choose.
Locally, Butler Area School District lost about $5 million in such a deal in 2008.
Cathy Rodgers, the district's director of business services, said the district refinanced to get out of the deal and believes it would have lost even more money if it hadn't backed out.
"I would never advise or recommend to do [a swap]," she said.
A 2009 examination by Mr. Wagner's office said about 107 of Pennsylvania's 500 school districts, or 21.4 percent, and 86 local governments had entered into swap agreements, according to information from the state's Department of Community and Economic Development from October 2003 and June 2009.
Mr. Wagner, who has said he is mulling an entry into the Democratic primary contest for next year's gubernatorial election, said after his testimony that he hasn't yet made up his mind on the possible run and doesn't know when he will decide.
Kate Giammarise: email@example.com, 717-787-4254 or on Twitter @KateGiammarise.