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House Co-Sponsorship Memoranda

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House of Representatives
Session of 2019 - 2020 Regular Session


Posted: January 15, 2019 09:50 AM
From: Representative Francis X. Ryan
To: All House members
In the near future I plan to reintroduce a “SWAPS” and “DERIVATIVES” bill (former HB1131). My legislation would restrict government entities from entering into interest rate management agreements, commonly known as “swaps” or “derivatives”.

Swaps are contracts under which parties agree to exchange (or swap) cash flow payment obligations. Under current law, a swap is required to relate to specific debt being issued by a local government under the Local Government Unit Debt Act (LGUDA). Swaps are between the local government and a financial institution, commonly referred to as the “counterparty”.

The most generic swap structure involves the local government issuing variable rate debt and then entering into a swap under which the counterparty makes a variable rate payment to the local government and the local government makes a fixed rate payment to the counterparty. The goal is to create a “synthetic” fixed rate issue at a lower rate than if the local government issued regular fixed rate debt.

All of these swap structures involve the local government assuming risks it does not assume when it does a normal fixed or variable rate bond issue. Also, if the local government wants to get out of a swap early, it can end up having to pay a large termination fee to the counterparty.

When the Great Recession hit in 2008 and interest rates went low (and stayed low), many of the risks inherent in swap structures became reality and caused multi-million dollar losses for local governments, authorities, and school districts. From October 2003 to June 2009, Pennsylvania local governments, authorities, and schools entered into 626 swaps transactions on $14.9 Billion in debt and a number of them lost millions in taxpayer dollars due to swaps. Taxpayers cannot afford to pay losses incurred by their local governments on risky financial products.

I believe swaps represent gambling with taxpayers’ money. I hope you will join me in cosponsoring this important piece of legislation.

Introduced as HB320