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Auditor General Jack Wagner Says Pa. Turnpike's Dealings in Risky Swaps Has Cost Taxpayers and Motorists At Least $108 Million
By: PR Newswire
Jan. 8, 2013 03:04 PM
Audit reveals six findings, offers 20 recommendations for improvement
HARRISBURG, Pa., Jan. 8, 2013 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner said that an audit released today of the Pennsylvania Turnpike Commission has found that the turnpike's involvement in interest-rate swaps has cost Pennsylvania taxpayers and turnpike motorists at least $108.9 million. Wagner said the turnpike's strategy was to use the swaps to save money, but it has instead proved to further saddle the debt-ridden commission by not using conventional fixed-rate bonds to finance its debt.
Under Act 44, a Lease and Funding Agreement was entered into by the turnpike and PennDOT, which requires the turnpike to pay PennDOT $450 million a year, or nearly $24 billion, over a period of 50 years to provide funding for roads, bridges and transit. According to news reports, the turnpike raised tolls only five times from its opening in 1940 through 2004. Since Act 44 was implemented in 2007, there have been five annual toll increases, including one that took effect Jan. 6. Wagner reiterated today that the commission's long-term debt has increased by more than 200 percent, from $2.6 billion to $8.3 billion, since the General Assembly approved Act 44 of 2007.
"Given its precarious financial position relative to Act 44 payments, the turnpike should not use these complicated and risky deals," Wagner said. "The Turnpike Commission should terminate its swap deals and ban all swap use in the future for the sake of Pennsylvania taxpayers and the motoring public as soon as it is financially feasible to do so."
Interest-rate swaps are legal agreements between two parties – a debt-financing entity and an investment bank – on which way interest rates will move. The party that guesses correctly gets paid, and the party that guesses incorrectly must pay. The payments are determined by the amount of public debt financed with variable-rate loans.
A 2009 investigation completed by Wagner's office of the Bethlehem Area School District found that on a statewide basis, 107 of 500 school districts and 86 local governments had $14.9 billion in public debt tied to swaps. The numbers have since increased to $17.5 billion in public debt, encompassing 108 of 500 school districts and 101 local governments. In the process, millions of public dollars have been lost in interest-rate swaps deals.
Wagner's audit, which covered the period Jan. 1, 2007 through Aug. 31, 2011, found that the turnpike's 23 active swaps had a negative book fair value of $29.3 million as of May 31, 2011. Furthermore, Wagner's audit revealed that the turnpike had paid $59 million in fees and interest for terminated swaps, and $49 million in fees and interest on active swaps, for a total of $108,972,133 paid out in swaps losses between Dec.16, 1998 and Aug. 31, 2011.
"Swaps may be perfectly acceptable for the private sector, where private citizens are free to decide how much risk they can tolerate when their own money is at stake, but swaps should have no role in government, where the taxpayers' money is at stake," Wagner said.
In addition to recommending that the Turnpike Commission terminate all remaining swaps as soon as it is fiscally responsible to do so and refinance, if necessary, with conventional fixed-rate bonds, Wagner also recommended that the Turnpike Commission promptly adopt a resolution unequivocally and permanently prohibiting the use of swaps in the future.
In all, Wagner's audit made a total of six findings related to the operation and maintenance of the Pennsylvania Turnpike, and offered 20 recommendations to fix the noted deficiencies. The five other report findings are summarized as follows:
Wagner's auditors found that the turnpike's liberal and inadequate policy of providing toll-free rides to turnpike employees and vendors, not only for business but for personal travel as well, amounted to 7,000 free rides and at least $7.7 million in lost toll revenue between January 2007 and August 2011.
Traffic volume on the turnpike has remained stagnant for the past five years. During fiscal year 2010-11, traffic volume on the Pennsylvania turnpike totaled over 189 million vehicles, including 165 million passenger vehicles (87 percent) and 24 million commercial vehicles (13 percent). The total net revenue generated from tolls in fiscal year 2010-11 was $763 million ($436 million or 57 percent from passenger vehicles, and $328 million or 43 percent from commercial vehicles). An increasing percent of revenue (47 percent in 2011) goes toward debt service mainly due to the burdens of Act 44 – passed in 2007.
The turnpike's workforce consisted of 2,104 employees as of May 31, 2011. It is administratively headed by a chief executive officer and a chief operating officer. The Turnpike Commission manages/oversees 21 maintenance facilities, 5 tunnels, 64 toll interchanges, 17 services plazas, and controls a total of 546 roadway miles.
A complete copy of Wagner's audit of the Pennsylvania Turnpike Commission is available at www.auditorgen.state.pa.us.
Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts thousands of audits each year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's website at www.auditorgen.state.pa.us .
SOURCE Pennsylvania Department of the Auditor General
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