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10/27/2021 01:40 PM
Pennsylvania House of Representatives
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20210&cosponId=34456
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House of Representatives
Session of 2021 - 2022 Regular Session

MEMORANDUM

Posted: January 28, 2021 02:51 PM
From: Representative Francis X. Ryan and Rep. Barbara Gleim, Rep. Dawn W. Keefer, Rep. Andrew Lewis
To: All House members
Subject: Municipal Debt Reform Package (Prior HB's 320, 882, 883 & 884)
 
In the very near future, Representatives Gleim, Keefer, Lewis and myself will be introducing a series of bills on municipal government reform 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.

This Municipal Debt Reform package will address:

1. Swaps & Derivatives Restrictions (RYAN Prior HB320)
2. Local Government Debt Act (GLEIM Prior HB882)
4. First Class City Swaps (KEEFER Prior HB884/Mihalek)
3. Ethics Commission & Municipal Authorities (LEWIS Prior HB883)


The Senate Local Government Committee held hearings in the fall of 2012 to examine the financial situation surrounding the Harrisburg Authority and its relationship to the fiscal distress of the City of Harrisburg. The hearings were in response to a forensic audit which cast serious doubt on the ability of current state laws to protect communities against transactions which threaten their fiscal stability. Several state laws designed to prevent unsound projects and borrowing were called into question by the hearings, including laws pertaining to performance bond requirements and conflict of interest prohibitions.

The findings of the forensic audit and the testimony from the two (2) hearings also touched on certain aspects of the Public Official and Employee Ethics Act (the “Ethics Act”) and the Municipal Authorities Act of Act 1945 (“Municipal Authorities Act”).

The Ethics Act , Act 93 of 1998, Chapter 11, 65 Pa.C.S. § 1101 et seq., provides that public office is a public trust and that any effort to realize personal financial gain through public office other than compensation provided by law is a violation of that trust.

Title 53 Pa Municipality Authorities Act of 1945 contains a provision that is unique in PA statutes. Section 5614(e) of Title 53 states that any contract entered into by an authority where there is such a conflict of interest is void. The said provision does not seem to be geared at going after the member or officer or employee of the authority who has the conflict. There is no enforcement mechanism against the offender in the Municipality Authorities Act.

This would specifically incorporate a reference to the Municipal Authorities Act (Title 53) section in the Ethics Act (Title 65) as one of the prohibited conflicts of interest acts and would empower appropriate agencies with enforcement and prosecution powers. This would confer explicit jurisdiction upon the Ethics Commission to get involved if the need arises.

Finally, this legislation would amend Title 53 Pa. Consolidated Statutes to require proceeds from borrowing under the Local Government Unit Debt Act shall not be used for any purpose unrelated to the project for which the debt was incurred, nor placed in any account used by the authority or any other local government unit for any unrelated purpose.

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



Document #1

Introduced as HB454

Description: MUNICIPAL DEBT REFORM PACKAGE: Swaps & Derivatives Restrictions (RYAN Prior HB320)

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.
 

Document #2

Description: MUNICIPAL DEBT REFORM PACKAGE: Local Government Debt Act (GLEIM Prior HB882)
 
The bill would make reforms to the Local Government Unit Debt Act (LGUDA). Much of the information presented at the hearings centered on the provisions of the LGUDA (53 Pa.C.S. §§ 8001-8049). That Act provides for review of project financing's by the Department of Community and Economic Development (DCED), defines the different types of debt a municipality may enter into, and sets limits on the amount of debt a municipality can incur without voter approval.

This bill would:

· Establish an actual review process of complicated transactions by DCED before debt is incurred;
· Eliminate the ability to charge a fee for issuing a guarantee;
· Limit the ability of municipalities to provide unlimited guarantees of other entities’ debts;
· Amend the “self-liquidating” and “working capital” definitions to prohibit reimbursements for payments
made under a guarantee or other non-project-related costs;
· Provide for fiduciary duties of those who represent local governments, as well as penalties for false filings.
 
 

Document #3

Introduced as HB456

Description: MUNICIPAL DEBT REFORM PACKAGE: First Class City Swaps (KEEFER Prior HB884/Mihalek)

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.
 

Document #4

Introduced as HB457

Description: MUNICIPAL DEBT REFORM PACKAGE: Ethics Commission & Municipal Authorities (LEWIS Prior HB883)

The Senate Local Government Committee held hearings in the fall of 2012 to examine the financial situation surrounding the Harrisburg Authority and its relationship to the fiscal distress of the City of Harrisburg. The hearings were in response to a forensic audit which cast serious doubt on the ability of current state laws to protect communities against transactions which threaten their fiscal stability. Several state laws designed to prevent unsound projects and borrowing were called into question by the hearings, including laws pertaining to performance bond requirements and conflict of interest prohibitions.

The findings of the forensic audit and the testimony from the two (2) hearings also touched on certain aspects of the Public Official and Employee Ethics Act (the “Ethics Act”) and the Municipal Authorities Act of Act 1945 (“Municipal Authorities Act”).

The Ethics Act , Act 93 of 1998, Chapter 11, 65 Pa.C.S. § 1101 et seq., provides that public office is a public trust and that any effort to realize personal financial gain through public office other than compensation provided by law is a violation of that trust.

Title 53 Pa Municipality Authorities Act of 1945 contains a provision that is unique in PA statutes. Section 5614(e) of Title 53 states that any contract entered into by an authority where there is such a conflict of interest is void. The said provision does not seem to be geared at going after the member or officer or employee of the authority who has the conflict. There is no enforcement mechanism against the offender in the Municipality Authorities Act.

This would specifically incorporate a reference to the Municipal Authorities Act (Title 53) section in the Ethics Act (Title 65) as one of the prohibited conflicts of interest acts and would empower appropriate agencies with enforcement and prosecution powers. This would confer explicit jurisdiction upon the Ethics Commission to get involved if the need arises.

Finally, this legislation would amend Title 53 Pa. Consolidated Statutes to require proceeds from borrowing under the Local Government Unit Debt Act shall not be used for any purpose unrelated to the project for which the debt was incurred, nor placed in any account used by the authority or any other local government unit for any unrelated purpose.