With Pennsylvania Gov. Ed Rendell yesterday signing a bill allowing local governmentunits to use interest rate swap agreements, many in the municipal bond community expectthe new law will provide tools for savings but not revolutionize the local market - atleast for now.
The law, which amends the Local Government Unit Debt Act, goes into effect immediately.School districts and municipalities may now enter into fixed- to floating-rate swaps,taking the risk that rates may be lower at a later date.
Traditionally fiscally conservative, the commonwealth's 501 school districts and 3,500towns, cities, and counties often sell debt in smaller, fixed-rate deals, unencumberedby Pennsylvania's unlimited tax pledge, which lets issuers bypass a public referendumbefore issuing bonds.
Dipping their toes in the complex waters of swap agreements may take some issuers longerto try, according to David Sallack, a managing director at Public Financial Managementin Harrisburg who has followed the legislation and whose firm was involved in draftingthe bill.
"I think they're still going to be reluctant to issue variable-rate debt, but at leastit opens up an opportunity," Sallack said.
Julius Coursey, a senior vice president with Philadelphia-based Fairmount CapitalAdvisors Inc., also questioned how quickly issuers would act on the law but noted thelaw marks a big change for municipalities.
"I would say that there will be a rush of marketing individuals. Whether there's a rushof execution remains to be seen," he said.
For now, Sallack sees his firm's role in the transition as mainly educational. But sincethe bill requires an independent third party to review swap transactions, he admits thelegislation may prove lucrative for financial advisers.
"It could be in the future," he said.
Joan Stern, an attorney who chairs the public finance practice at Blank Rome and wasalso involved in drafting the bill, expects there will be more derivative financingacross the state. However, she believes that larger issuers with bigger debt portfoliosat first may be among the first to use variable rate financing.
One such issuer is the Pittsburgh School District, which is considering using swaps whenit sells roughly $20 million in new money later this fall to help fund its ambitiouscapital program. To aid the education of school districts in swaps, statewide schoolassociations are preparing training sessions.
Stern stressed the safeguards built into the law designed to protect districts. Forinstance, local government units are subject to post-execution monitoring and financialstatement disclosure.
Frederic L. Ballard Jr., a partner with Ballard Spahr Andrews & Ingersoll, maintainedthat the biggest change coming from the law is the chance of savings for localgovernments.
"The big thing this can do is cut the interest rate cost for municipalities that can useit," Ballard said, adding, "The good in this is that it's good for issuers."
Previously, only Pennsylvania authorities that serve as conduit issuers could use swaps.Excluded from the law is Philadelphia, although its school district is covered.
