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Senate of Pennsylvania
Session of 2015 - 2016 Regular Session


Posted: December 18, 2014 09:48 AM
From: Senator Rob Teplitz and Sen. Mike Folmer, Sen. John P. Blake, Sen. John H. Eichelberger, Jr.
To: All Senate members
Subject: Bipartisan Municipal Debt Bill #4: First Class City Swaps
In the near future, I plan on again introducing legislation that 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.

The City of Philadelphia supports the legislation, and the legislation was unanimous passed by both the Local Government and Appropriation Committees last session. Senators Folmer, Blake, Eichelberger, Boscola, Yudichak, Wozniak, Brewster, Farnese, Waugh and Browne served as co-sponsors of this legislation when I first introduced the legislation last session. It is worth noting that I am co-sponsoring Senator Folmer’s companion piece of legislation that institutes similar restrictions on the use of swaps by local government units and municipal authorities. These bills will ensure that a uniform rule applies statewide. Please join me in placing reasonable taxpayer protections on the use of interest-rate management agreements.

Thank you for your consideration.

Introduced as SB343