PhillyDeals: City looks into its losses gambling on rising rates

On the roof of Tower Place at Broad and Spring Garden, Bart Blatstein discusses his plans for a casino nearby.
On the roof of Tower Place at Broad and Spring Garden, Bart Blatstein discusses his plans for a casino nearby. (DAVID MAIALETTI / Staff Photographer)
Posted: October 21, 2012

Some people don't gamble. And some shouldn't.

Developer Bart Blatstein says he'll unveil his plans for a billion-dollar casino resort at The Inquirer's former home on North Broad Street this week.

Owners of competing casinos in Atlantic City, Bensalem, Chester, Fishtown, and King of Prussia worry that there aren't enough gamblers here to support all of the investors, builders, dealers, slot mechanics, hotel workers, and gambling-tax-funded government agencies hoping to profit from another gambling hall.

But maybe a casino is a proper Philly attraction, after all: This city managed to lose many millions in the last nine years by betting that interest rates would rise, at a time when they've fallen to record lows.

How much the taxpayers lost is something we might learn Tuesday, as city Councilman Jim Kenney (D., at-large) begins hearings to figure out what caused those "huge losses" and whether we might get some back.

The City of Philadelphia, its schools, and other public agencies run on taxes, fees, state and federal aid - and billions borrowed through tax-free bond sales.

Urged on by private-sector financial advisers, approved by bond lawyers, the city took advantage of a 2003 state law approved by then-Democratic Gov. Ed Rendell and Republican legislative leaders to "swap" interest-rate risk on the next several years' borrowings with clients of JPMorgan, Goldman Sachs, Wells Fargo, and other big Wall Street banks.

The swaps were supposed to give the city lower borrowing costs in the near term, plus protection from rising interest rates. Instead, the drop in rates and the failure of bond insurers in the 2008 financial crisis forced the city to pay extra to the banks and their clients who took the other, winning side of Philadelphia's bets that interest rates would rise.

How much did we lose? City officials have been vague about that. This past spring, the union-aligned Pennsylvania Budget and Policy Center totaled a string of payout and obligation reports by city agencies and announced that Philadelphia's swaps losses approached $500 million. Auditor General Jack Wagner said towns have no business doing such "complex" transactions.

City Treasurer Nancy Winkler and school district finance deputy Christina Ward defended swaps as a useful tool, properly applied. They also disputed the center's figures, noting that the city saved millions in the early years of its swaps, though Winkler couldn't say how much. Facing Kenney's hearings, Winkler has told staff to dig up more data.

Kenney is mad at the banks. "When their bad behavior creates a crisis, that they benefit from, and the taxpayer bails them out, and we're still paying, am I supposed to believe it's our bad?" he asked me.

The banks say it's not them, it's their other clients who bet against Philadelphia, who deserve to collect, I noted. "That reminds me of the scarecrow, pointing different directions," Kenney said. "But we're still the ones on the hook."

It's easy to bash distant banks. Kenney will have a chance to ask tough questions to witnesses from Philadelphia-based Public Financial Management Inc. (PFM), the oldest and biggest of the national firms that make a living advising municipal borrowers. Winkler worked at PFM before she took the city job, where she inherited the city's swap obligations.

Philadelphia is one of many towns that lost on swaps. A forensic audit of Harrisburg last winter found that the city borrowed millions it couldn't repay through a string of high-fee, high-risk, poorly secured financing projects and related swaps arrangements. Harrisburg's lawyers and advisers, including PFM, signed off on these deals without flagging obvious problems.

The firms denied wrongdoing. But Harrisburg's state-appointed receiver at the time, David Unkovic, called for state and federal investigations of all those who benefited at taxpayers' expense. No such investigation has been announced.

Maybe Harrisburg's losses are more egregious than Philadelphia's. And maybe it is merely expensive, not illegal, in Pennsylvania today, for public officials, their hired professionals, and Wall Street banks to post risky bets with public funds.


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

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