Philadelphia has lost $331 million in net interest payments and cancellation fees related to swaps, the Pennsylvania Budget and Policy Center wrote in a report.
The Harrisburg-based think tank said the city could lose a further $240 million in net interest payments from still-active swaps between city agencies and financial institutions if interest rates remain low.
An interest-rate swap is a derivative instrument in which one party exchanges a stream of interest payments in exchange for another rate. A bond issuer, such as a city government or school district, will often take out swaps to convert a variable rate to a fixed one to protect against interest-rate hikes.
But, according to the report, interest rates plummeted during the recession, and counterparties received larger payments than the bond issuers.
“These financial institutions have profited, while Philadelphians have paid the price through lost city services, lost jobs and lost school programs,” the report said.
Philadelphia cut nearly $100 million from its budget during 2008 and 2009, and its school district faced a $629 million shortfall this year, which it closed by laying off teachers and cutting student programs.
According to state auditor general Jack Wagner, 107 school districts and 86 local governments entered into swap agreements related to $15 billion of debt between October 2003 and June 2009, the report said.
