PhillyDeals: Adviser guilty of fraud linked to Pa. swaps

None of the government officials or their hired experts "adequately evaluated or assessed the potential risks," the auditors wrote. The audit said this resulted in, for example, millions in payments to Royal Bank of Canada for setting up swaps contracts of questionable value, and in decisions not challenged by paid pros such as Philadelphia-based Public Financial Management Inc. (PFM), the nation's largest muni-bond adviser; or Milt Lopus, a former PFM official who set up his own advisory business; or Pottstown- based Investment Management Advisory Group Inc., which advised the authority on swaps deals.

"The swaps are not the reason for the authority's financial difficulties," Royal Bank of Canada spokesman Kevin Foster told me. "The swaps have worked as expected and have reduced the interest expense

of the authority's debt."

But Harrisburg City Council- man Brad Koplinski wants "a federal investigation," he says. "This entire process has been about greed."

Too much

The nonprofit Pennsylvania Budget and Policy Center and the Fight for Philly group  last week estimated at more than a half- billion dollars the cost of ending swaps agreements for the city and its public agencies, plus the cost of entering into swaps deals in the first place, instead of just selling bonds. Center head Sharon Ward called on JPMorgan Chase & Co., Wells Fargo & Co., and other banks to return the money.

"We understand people are angry. But their report is really wrong," Philadelphia City Treasurer Nancy Winkler told me.

A former head of PFM's municipal-bond unit, Winkler and her deputy, fellow PFM alumnus James M. Lanham, along with Water Department finance chief Joseph S. Clare III, say the center's report exaggerates the cost of swaps because it compares the city's actual costs over multiyear financial contracts to hypothetical costs at today's record-low rates.

The city officials were unable to give more precise numbers representing actual costs and benefits of swaps. "It would take an extraordinary amount of work," Winkler said.

Still at it

Two years ago, state Auditor General Jack Wagner called on Pennsylvania to ban swaps sales to towns, citing losses in Bethlehem and other cities.

"It upset me, to paint us with the same brush," Christina Ward, a senior finance official at the Philadelphia School District, told me. "We were much more conservative." The district had a negative $39 million swaps position in its last financial report, after paying $60 million- plus to replace previous swaps.

Pennsylvania towns continue to enter what the state calls "qualified interest-rate-manage- ment agreements." In the last three months, state records show, 22 towns and school districts have bought swaps and other "qualified" agreements.

Contact Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.