Turnpike Commission Gambles with Billions

The Pennsylvania Turnpike Commission (PTC) has recently added to its long track record of inefficiency and corruption by using taxpayer funds to enter into 26 interest rate swaps tied to over $2 billion in debt.

Auditor General Jack Wagner called these swaps “gambling with public money” and has asked the Turnpike Commission to terminate the deal.

Interest-rate swaps made the headlines last year when Wagner called for a ban on municipalities from using swaps, after Bethlehem Area School District lost over $10.2 million in interest rate agreements. Wagner now wants independent agencies, like the Turnpike Commission, barred from the practice as well.

So what are interest rate swaps?

Interest-rate swaps are a market tool that allows investors to bet on future interest rates. Two parties (e.g., Turnpike Commission and a bank) make an agreement to pay each other interest on the same principal amount, with one party paying a fixed interest rate and the other party paying a floating rate.

  • If interest rates rise, the party paying the fixed rates benefits, but if interest rates fall the party paying the floating rate benefits.

The Bethlehem Area School District took out a loan with a floating rate. The district, expecting interest rates to rise in the future, wanted to lock in a fixed rate and entered into a rate swap with a bank. The bank would pay the floating rate to the school and the school would pay a fixed rate to the bank. This worked well until the market crashed in 2008 and interest rates plummeted. The school district ended up paying out far more than it received.

Not only is speculating on interest rates risky but entering into such a swap involves numerous fees for which taxpayer funds are put on the line.