Dear [City Council member]
I want to commend city council for holding a hearing on the impact of questionable financial transactions, known as “swaps,” on the budget of the city and school district of Philadelphia. A report earlier this year indicated that the city and school district have already lost $331 million in net interest payments and cancellation fees relating to swaps. The city has exposure that could rise to $240 million more according to the Pennsylvania Budget and Policy Center. The school district also has remaining swaps, and while it claims those swaps are serving the district well, I want to express our concerns.
Swaps, ostensibly, are a way of protecting against the impact of interest rate spikes on variable rate bonds issued by local governments. In particular, however, when interest rates remain low, swaps can became financial sinkholes whose repayment takes priority over funding needed services. Too often the swap agreements have stiff fines for cancellation.
Teachers are not experts in these matters, but we know two things: First, many of the banks seeking to profit from swaps have already been bailed out by the taxpayers. Rather than work to return the favor, these banks are too often seeking to add insult to injury. Second, we know that there are legitimate charges that certain banks used to manipulate the interest rate in order to keep it low, thereby adding to the harm swaps have caused our community.
What we have become experts on is the toll that recent budget cuts have taken on our schools. The cuts in state aid have been structured to hit Philadelphia particularly hard. Anything that limits our city’s ability to invest its own funds on behalf of its children to make up for state disinvestment is objectionable, and any action the city and the SRC can legitimately take in this regard would be the right thing to do for our children and our communities.
The city council of Oakland has pledged to not do business with Goldman Sachs ever again until it lets the city out of the termination fee associated with its swap agreement. Sharon Ward of the PBPC asked you to renegotiate the terms of your swaps to allow for exit without termination fees and adjustments to interest rates. I urge you to investigate all such options thoroughly and to engage not just with parties to current swaps but with prior ones as well. Most importantly, even if all you can do is take your financial business elsewhere, I urge you to act to do so.
JERRY T. JORDAN