Introduction of Legislation as a Result of SWAPS Investigation by Auditor General
Press Conference

Good afternoon.

As Chairman of the Senate Finance Committee, I am aware of the many financial issues that are pressing local taxing bodies. Just like the state and the federal governments, Pennsylvania's municipalities and school districts are struggling to get through the current economic crisis.

As a result, more than 100 Pennsylvania school districts have turned to interest rate swaps as a way to generate additional income and for some, as was the case in the Bethlehem Area School District, the financial strategy proved to be a public resource management mistake.

Conventional wisdom is that any time there is a chance for major financial gain, that opportunity is usually countered by the potential for major loss. That maxim was certainly proven to be correct over the past few years with the near collapse of national financial and banking networks caused by disastrous and irresponsible investment practices.

It's one thing for Wall Street to develop and market speculative investment products. It's quite another for school districts to become part of this market.

I recognize the pressure that school business managers and school board members are facing. They must address steadily rising costs and are now facing substantial increases in pension fund contributions in the very near future.

And, I know that school districts are limited in their ability to address those cost increases since property taxes are their primary source of revenue.

Over the years, when the Legislature has taken up the issue of property tax reform, proponents of the current taxing system have pointed out that property taxes provide a stable and reliable system for generating revenue.

Unlike reliance on sales taxes or wage taxes, taxing bodies can depend on a certain amount of revenue each year from real estate taxes, even accounting for delinquencies and late payments. That reliability is an asset, but it is also a negative in that for a school district to generate additional revenue it must raise its overall millage rate and ask more from taxpayers.

After years of steady property tax increases, the Commonwealth took action by enacting legislation that ties millage rate increase caps to the economy and requires school districts to go to the Department of Education for a waiver or to the voters for approval of a referendum.

So, it is understandable that most school districts are looking for alternative ways to generate additional revenue, ranging from advertising in their sports stadiums to franchise rights for soft drink machines in their hallways.

Under those conditions, it is understandable that school districts were attracted by the allure of interest rate swaps. Given the right conditions, these swaps could generate substantial additional revenue. But as I said before, the chance of big gain is usually accompanied by the potential for substantial loss.  The prospect of potential loss, like financial decision for any individual or entity whether public or private, must be balance against goals and purposes.  Given that school districts are charged with the responsibility to provide consistent and stable educational programming, the diversification of revenue sources they rely on must be overwhelmingly consistent and stable.  Unfortunately, the inclusion of Qualified Interest Rate Management Agreements as part of that financial portfolio does not strike that balance

The experience of the Bethlehem Area School District is a stark example of what can happen when a swap goes wrong. Instead of generating revenues for the District, swap agreements left taxpayers with a new $10 million liability.

Regardless of the intentions of the District when it entered into the deal, that decision simply increased the burden placed upon property owners and further sapped the fiscal strength of that school system. In this period of economic uncertainty, with reserve funds depleted and school districts making hard choices effecting the future educational attainment of our children, the millions lost in these transactions simply cannot be risked and/or sustained.  .

Accordingly, it is my position, along with Senator Boscola, that we must use that experience as a catalyst to ensure that nothing like this can happen in the future.

With that in mind, I support Senator Boscola and this legislation that will end interest rate swaps by local school districts. We need to close off this practice before more of Pennsylvania's school districts end up on the losing end of one of these gambles at an unacceptable cost to property owners and students.

I hope we can quickly move this measure through the legislative process and protect the interests of taxpayers and our young people.

Thank you.