Audit says Pennsylvania Turnpike losing millions on risky interest deals
HARRISBURG — Two days after the Pennsylvania Turnpike hiked tolls for the fifth straight year to help cover debts, the state's fiscal watchdog said risky investment deals cost the agency $109 million over 13 years.
The review by Auditor General Jack Wagner, released on Tuesday, said interest-rate deals known as “swaps” are further saddling an agency whose debt more than tripled in five years.
The turnpike brings in more than $800 million a year in tolls, but is spending about $330 million to operate and $400 million on debt payments in addition to a $450 million annual contribution to PennDOT.
The agency's debt jumped from $2.6 billion to $8.3 billion since Act 44 took effect in 2007, forcing it to borrow money and raise tolls annually, Wagner said. Tolls have jumped 35 percent for E-ZPass customers and 71 percent for cash customers since 2009.
“Given its precarious financial position relative to Act 44, the turnpike should not use these complicated and risky deals,” Wagner said, referring to the state law that requires it to give PennDOT $450 million a year for road, bridge and transit projects.
The Turnpike Commission said Wagner's analysis “is incomplete and leads to incorrect conclusions.” Spokesman Carl DeFebo deferred comment to its written response to the audit.
Wagner, who leaves office Jan. 15, criticized commissioners for expenses that included hotel stays sometimes exceeding $300 a night, and overall “lack of transparency” in accounting for the costs.
Wagner released portions of his audit before, citing the turnpike's spiraling debt and toll-free travel provided to nearly 5,000 contractors, consultants and other state government officials.
In a 2010 audit, he warned about the costs of swaps, saying then that if the turnpike had to terminate those investments it would lose almost $146 million, an equivalent of three months' worth of toll revenue. That year the turnpike had $2.23 billion tied to 26 active swaps.
The Turnpike Commission isn't alone in use of interest-rate swaps as an investment tool. In 2009, Wagner's office found that, statewide, 107 of 500 school districts and 86 local governments had $14.9 billion in public debt tied to swaps. The numbers since have increased to $17.5 billion, encompassing 108 school districts and 101 local governments, he said.
Swaps are legal agreements between parties gauging which way interest rates might move. The party who guesses correctly gets paid by the party who guesses incorrectly. Payments are determined by the amount of public debt financed with variable-rate loans.
The turnpike lost $59 million in fees and interest on swap deals it terminated and $49.9 million in interest and fees for 23 active swaps — a combined $109 million in swaps losses from December 1998 to August 2011, Wagner said.
The active swaps have a negative market value of $29.3 million, the amount the agency would pay out if it terminated them.
“An argument could be made that interest rates could change and that active swaps could start producing net interest payments,” Wagner said. “… We caution that the reverse is also possible, that interest rates could change for the worse and the Turnpike Commission's swaps will continue to decline in value.”
The agency disputed Wagner's calculation of $59 million in losses related to termination of swaps, saying the moves saved $10.8 million.
“The termination payments were funded with tax-exempt, fixed-rate bonds issued at lower fixed rates than existed on the (variable-rate) swaps,” the turnpike said in its response to Wagner.
“The underlying debt now outstanding is (at a) fixed rate and pays lower interest than the net swap payments would have on the swap, had the swap remained outstanding,” the turnpike said.
Wagner said the turnpike should terminate all swap deals and ban use of such deals “for the sake of Pennsylvania taxpayers and the motoring public.”
He said the turnpike was “overly generous” in reimbursing the five-member commission for expenses. Commissioners did not submit itemized receipts, he said.
In all, commissioners were reimbursed $539,201 for vehicles, lodging, fuel, maintenance, conference fees, other transportation and electronic devices from Jan. 1, 2007 through Aug. 31, 2011.
The agency said it reviews commission expenses to ensure only the most reasonable and necessary expenses are reimbursed.