Pennsylvania officials will conduct a public hearing next week on an initiative to ban local governments from using derivatives.

The Senate Finance Committee will hold the meeting Wednesday. No vote is scheduled and the committee’s website, as of press time, did not list who would be presenting information during the ­hearing.

The legislation, S. 1277, involves prohibiting the use of swaps and derivatives by all school districts, cities, towns, and counties, regardless of size.

The initiative follows auditor general Jack Wagner’s report released in mid-November showing that the Bethlehem Area School District in Lehigh County lost millions of dollars in swap agreements.

“After the effective date of this paragraph, no local government unit may negotiate or enter into a qualified interest rate management agreement,” the legislation reads.

Also up for discussion is S. 1278, a bill that would require local governments that choose to hire outside financial consultants to do so through competitive bid.

While derivatives can engineer lower interest rates for borrowers, such instruments involve potential basis risk between different variable-rate indexes, counterparty risk, and the risk of losing credit enhancement on variable-rate bonds and notes.

The committee’s chair, Sen. Pat Browne, a Republican who represents Lehigh and Monroe counties, is co-sponsor of both bills. Democratic Sen. Lisa Boscola, who represents parts of Lehigh County, is the prime sponsor for both measures and spearheaded the legislation to restrict local governments from entering into swaps and derivatives.

According to Wagner’s report, the school district paid counterparty JPMorgan Chase & Co. a termination fee of $12.3 million in May 2009 when the district refinanced a 2003 floating-rate note deal to fixed rate after Dexia SA did not renew a liquidity enhancement on the variable-rate notes. The net cost of the swap was $8.84 million, as the district had received a $3.46 million up-front payment on the derivative.

The public hearing will follow Gov. Edward Rendell’s Tuesday speech to the legislature in a special session. The governor called the session yesterday in order for lawmakers to address a $472.5 million transportation funding deficit in fiscal 2011, which begins July 1.

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.