Port Authority of Allegheny County to cover bet
The cash-strapped Port Authority of Allegheny County will shell out $39.2 million to cover a risky financial bet it made seven years ago.
The payment will cover fees required to get out of an interest-rate swap agreement with financial management company Merrill Lynch. It will raise the authority's average debt payment to $22 million a year, up from $19.7 million annually, according to the authority.
Authority spokesman Jim Ritchie said the increased debt payments won't affect operations because officials will tap the capital budget for the money. That account includes money from the state for debt payments and improvements to facilities.
Port Authority will cut service 15 percent and lay off 180 workers next month, but the moves are related to shortfalls in the agency's chronically underfunded operational budget.
The swap with Merrill Lynch provided the authority with $10 million in cash in 2004. It enabled the authority through March this year to pay a 4.53 percent, fixed interest rate on its debt in exchange for regular payments based on a fraction of a rate at which banks lend money to one another.
"Back then, those rates pretty much balanced out, so there was no financial obligation to us," Ritchie said. "Then the market tanked."
Starting next month, the agreement would have switched to a variable interest rate, meaning debt payments would be unpredictable, hinging on ups and downs of the economy. So the agency Wednesday refinanced $263 million in outstanding debt, including the $39.2 million swap termination fee, at an average fixed rate of 5.29 percent through 2029.
"Sometimes these deals worked to the good of an agency," authority board member Jeff Letwin said. "Sometimes they didn't. We aren't doing them anymore. There's too much risk."
The Port Authority's moves prompted Moody's Investor Service to upgrade its rating on the agency's debt to A1 status, citing the locked-in interest rates and guaranteed money the authority gets to cover increased debt payments.
Jake Haulk, president of the Castle Shannon-based Allegheny Institute for Public Policy and a frequent critic of the authority, said the Port Authority needs to be conservative with finances. He thinks getting out of the 2004 agreement contains its own risk.
"I don't like the idea that they are ($39.2 million) more in debt. If rates start shooting up, we'll say they're brilliant. If rates don't go up, it will have been a bad decision," Haulk said.
Public agencies routinely entered into swap contracts to hedge against the risk of changing interest rates, but that changed when bond and other financial markets began to freeze with the onset of the recession.
Auditor General Jack Wagner last year urged the legislature to ban authorities from entering into such deals.