Massachusetts Gov. Deval Patrick will consider an initiative to further regulate swap agreements for independent authorities after the legislature passed the measure late Wednesday.
The derivatives proposal is an amendment to H. 4142, a bill that reserves 50% of any growth in capital gains receipts to the state’s rainy-day fund and another 2% towards other post-employment benefit obligations. Massachusetts’ unfunded OPEB liability is roughly $13 billion.
Paul Lehnus, an aide to Sen. Mark Montigny, D-New Bedford, who pushed for the derivatives amendment, said the governor could be inclined to veto the bill because of the amendment, but that would depend upon how important the capital gains measure is to Patrick. Montigny is co-chair of the Joint Committee on Bonding, Capital Expenditures, and State Assets.
Cyndi Roy, spokeswoman for the Executive Office for Administration and Finance, said the executive branch is reviewing the issue but hasn’t determined yet whether to sign the measure into law. The capital gains initiative originated in the governor’s budget proposal in January, Roy said. Patrick has until Aug. 9 to weigh in on H. 4142.
“We haven’t made a decision yet on what we’re going to do with that,” Roy said. “It’s on the governor’s desk now and we probably won’t do anything with it until next week.”
Lehnus said the administration in the last week has voiced concerns regarding derivatives regulation to Montigny’s staff due in part to criticism the executive branch has received from authorities and entities that would be affected by the amendment.
The initiative would require quasi-public entities and independent authorities to gain gubernatorial approval before entering into swap agreements. Along with the enhanced derivatives regulation, bonding agencies, authorities and the state Treasurer would submit by Sept. 4 all borrowing practices and swap agreements entered into from 1997 through 2009.
“A lot of the agencies have gone to [the administration] and said that they don’t want to report back on their transactions over the last 10 years,” Lehnus said. “And they’re also concerned that it could be somewhat burdensome to some of these independent authorities’ borrowing and financial transactions in the future.”
In addition, the amendment calls for the Massachusetts inspector general to investigate all derivatives that the Massachusetts Turnpike Authority entered into between 1999 and 2007 and all the parties involved, including the agency’s counterparties, UBS Securities LLC, Lehman Brothers, and JPMorgan. The IG would then file a report no later than Sept. 4.
The enhanced regulation is in response to five problematic and costly swap agreements for a notional amount of $800 million that MassPike entered into with UBS in 2001. Recent credit upgrades to the agency’s subordinate debt from Fitch Ratings and Moody’s Investors Service along with a new rating from Standard & Poor’s prevented MassPike from having to make a $190 million termination payment to UBS on four swaps attached to subordinate bonds.
In addition, the state continues its discussions with UBS regarding a potential $67 million termination payment on one derivative connected with MassPike’s Series 1997A senior Metropolitan Highway System bonds. MassPike has until Aug. 21 to cure the termination event.
Patrick on July 20 signed into law a measure to extend the state’s double-A general obligation guarantee to the five derivatives. That GO pledge will sunset on Nov. 1. UBS has yet to accept that credit guarantee, Roy said.
Fitch and Standard & Poor’s assign their BBB-plus and A-minus ratings, respectively, to the authority’s $1.28 billion of senior MHS debt. Moody’s rates the senior bonds Baa2 with a developing outlook.
UBS sent MassPike a termination event notice in late June after Ambac Assurance Corp, the insurer of the derivatives, lost its last single-A credit rating. To avoid termination payments, MassPike earlier this month agreed to dedicate $100 million of annual state revenue to subordinate bonds. In response, Fitch upgraded the $960 million of subordinate MHS debt to A from BBB and Moody’s replaced its Baa3 rating on the credit to A1. Standard & Poor’s assigns its AA rating to the subordinate lien.
While officials have addressed MassPike’s swap challenges, the authority also faces a class-action lawsuit against east-west motorists who pay tolls on I-90. The Massachusetts Turnpike Toll Equity Trust, the organization behind the suit, claims that using I-90 toll revenue from the Boston Extension and the Ted Williams and Sumner/Callahan tunnels for costs incurred on the non-tolled I-93 — namely the Central Artery Project, also known as the Big Dig — is unconstitutional.
The Boston Extension, the tunnels, and the Central Artery Project, are all part of the authority’s Metropolitan Highway System. MassPike documents indicate that for every MHS dollar, 58 cents goes toward Central Artery costs. As most of the MHS debt is related to the Central Artery Project, east-west motorists driving through the greater Boston area are paying for the non-tolled Big Dig infrastructure, the city’s main north-south roadway.
“A respected financial expert from Babson College hired by the trust estimated that more than $420 million has been illegally diverted from [MassPike] tolls to pay for the Big Dig in the last three years alone, according to a toll equity trust press release.
Today is MassPike’s deadline to file a response to the suit, said David Guarino, spokesman for the trust. Both parties on Aug. 6 will appear before Superior Court Judge Herman Smith in Middlesex Superior Court to begin hearings on a motion related to the suit.