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10/22/2019 01:46 AM
Pennsylvania House of Representatives
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20190&cosponId=28687
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House of Representatives
Session of 2019 - 2020 Regular Session

MEMORANDUM

Posted: March 6, 2019 04:18 PM
From: Representative Natalie Mihalek
To: All House members
Subject: MUNICIPAL DEBT REFORM BILL #3 - First Class City Swaps
 
In the very near future, Representatives Gleim, Lewis, Gaydos, Ryan and myself will be introducing a series of bills on municipal government reform in conjunction with the Senate to ensure an effective and broad approach to municipal government for the 21st century.

The 2008 financial crisis in the United States and the continued concern about instability in municipal financing in other states, as well as in the Commonwealth, requires a fresh look at the controls, processes and governance relating to municipal debt so that the risk factors influencing municipalities are known and contained.

The package of bills will be conjoined with RYANs HB320 – SWAPS and Derivatives Restrictions, which has already been introduced, and is in the Local Government Committee, making this a total package of five (5) bills.

This bill package, which have identical companion bills in the Senate, address:

1. Municipal Debt Reform – Local Government Debt Act (Rep Gleim)
2. Municipal Debt Reform – Ethics Commission and Municipal Authorities (Rep Lewis)
3. Municipal Debt Reform – First Class City Swaps (Rep Mihalek)
4. Municipal Debt Reform – Performance Bonds (Rep Gaydos)
5. RYANs Swaps & Derivatives HB320 (already introduced)

This legislation places certain restrictions on the use of interest-rate management agreements (otherwise known as "swaps"). Currently, there are no restrictions on the use of interest-rate management agreements by a First Class City or a First Class County.

Swaps are contracts under which parties agree to exchange (or swap) cash flow payment obligations. Swap structures involve the local government assuming risks it does not assume when it does a normal fixed-rate bond issue, and if the local government wants to get out of a swap early, the local government can end up having to pay a large termination fee to the counterparty. Quite simply, swaps are a form of gambling with public funds and must be restricted in their use.

The proposed legislation will advance the following taxpayer protections:

1) No payments shall be made to a First Class City or County by the counterparty except periodic scheduled payments, termination payments, and other fees incurred in connection with the swap.

2) The sum of all swaps entered into by the First Class City shall not exceed 30% of the total principal amount of the aggregate general obligation debt and other debt-related obligations supported by its general fund then outstanding.

3) Scheduled periodic payments and termination payments received on a swap shall pay periodic swap payments.

4) The scheduled expiration date of a swap shall not exceed ten (10) years unless the swap contains a provision allowing the First Class City to terminate at any time after ten (10) years without making a termination payment.

Please join us in cosponsoring this package of Municipal Debt Reform legislation.

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Introduced as HB884