The Pioneer Institute Criticized the Massachusetts Bay Transportation Authority's interest-rate swap practices.

The Massachusetts Bay Transportation Authority paid out an estimated $236 million in net swap interest on bonds the past 15 years, according to a report Tuesday by Pioneer Institute.

"The MBTA has been bleeding millions of dollars on reckless financial derivatives for many years," wrote Iliya Atanasov, a senior fellow for finance for Boston-based free-market leaning think tank Pioneer.

Poor financial reporting and internal controls, opaqueness and use of risky counterparties helped aggravate the problem, wrote Atanasov, despite warnings by the state auditor in 2008.

A message seeking comment was left with officials from the Massachusetts Department of Transportation, which has overseen the MBTA since 2009.

The MBTA, a state-run agency, operates the subway and bus systems in Greater Boston. It contracts through French company Keolis to operate its commuter rail system.

Gov. Charlie Baker and state lawmakers placed the authority under a state oversight panel last year after a record 109 inches of snow in Boston crippled parts of the transit system. In addition, the authority may scale back or even scuttle a 4.5-mile extension of Green Line streetcar service from Cambridge to Somerville because of cost overruns and inaccurate estimates.

The crisis also triggered a deeper examination of the authority. On Monday, audits by MBTA staff and outside firm KPMG revealed that a track maintenance employee totaled 2,600 overtime hours in less than a year while regularly approving his own overtime form. That fattened his take in 2015 to $315,000. He retired Jan. 31.

"The process does not allow people to approve their own overtime, but one of the things the audit is looking at is the extent to which the process is being followed," Transportation Secretary Stephanie Pollack said at a news conference that followed the Fiscal Management and Control board's monthly meeting.

Atanasov said reducing swap and debt obligations over the medium term while building a cash reserve is the best way to hedge against an economic downturn or other financial crisis.

"Organizations which drift away from their core activities fail," Atanasov wrote. "Financial management has not been among the MBTA's organizational strengths."

According to Pioneer, which culled MBTA data, about 10% of the authority's $5.1 billion of outstanding debt was variable-rate as of 2015.

The report accused the MBTA of opaqueness, saying its financial statement since 2001 have merely delivered boilerplate language regarding its approach to swaps. Only once from 2001 to 2014 did the MBTA list a swap payment as a separate item in its disclosure statements, preferring instead to roll such interest into the vague "interest expense" category.

"To the extent that it exists, the explanatory language in the disclosures is designed not so much to inform as to intimidate and deter public scrutiny," wrote Atanasov. "No plausible rationale is presented for issuing variable-rate bonds and overlaying them with costly swaps instead of just issuing callable fixed-interest obligations. No plausible rationale is presented for the swap reference rates, the chosen parties and their qualifications."

In addition, said Pioneer, counterparty risk defeats the purpose of financial derivatives. "The counterparties to the MBTA's interest-rate swaps are global investment banks," said the report. "These are not reliable parties."

Pioneer cited the MBTA's use of Bear Stearns and Lehman Brothers, both of which collapsed in 2008, and more recently, Deutsche Bank and Barclays.

Last September, after consultant Swap Financial Group told the MBTA that it should replace a counterparty with deteriorating credit, the authority petitioned the financial oversight board to replace Deutsche Bank with Barclays. Standard & Poor's had downgraded the latter over the summer, alongside but a notch higher than Deutsche Bank.

Pioneer also noted that KPMG, the authority's external auditor since 1990, has delayed its fiscal 2015 audit of the authority. "The unstated reason for KPMG's difficulty was an ongoing audit of the MBTA Retirement Fund, a private entity, whose audited financials were needed in determining the MBTA's pension obligations."

Backed by a 1973 state Supreme Judicial Court ruling, the MBTA Retirement Fund has resisted efforts to release pension data in the face of a sunshine provision to a 2009 transportation law and repeated prodding from transparency advocates. The latter say taxpayers funneled $1.1 billion to the authority in fiscal 2013 and that the "T," as locals call the system, contributed $55 million in that year toward pension costs.

In its January status report, KPMG also reported to have found "material weakness regarding the administration of the various MBTA pension plans" in auditing the MBTA's internal controls.

Last month, Pioneer reported that unused sick time among MBTA employees amounts to a perk of up to $49 million as of Dec. 31, 2014.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.