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October 7, 2013
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Pennsylvania Senate Local Government Committee Advances Bill No Longer Banning, But Limiting Municipal Interest Rate Swaps

by Timothy J. Horstmann

On October 22, 2013 the Pennsylvania Senate Local Government Committee moved an amended version of Senate Bill 903 out of committee for consideration by the full Senate. Senate Bill 903 originally would have prohibited municipalities and school districts from entering into interest rate swaps.  As amended, the bill no longer bans municipal interest rate swaps, but does impose new restrictions on the practice.

The new restrictions imposed by amended Senate Bill 903 are designed to limit a local government unit’s risk exposure in connection with an interest rate swap. Among the restrictions proposed is a requirement that the sum of the notional amount of the swap, taking into account any netting or offsetting transactions, and all other swaps entered into or guaranteed, and then in effect, not exceed 50% of the total principal amount of debt outstanding at the time the local government unit enters into the swap. Regional financing authorities primarily engaged in lending to local government units are exempted from this requirement.

Amended Senate Bill 903 also limits the term of all interest rate swaps to ten years. If a swap continues beyond a ten-year term, the local government unit that is party to the swap must have the right to terminate the swap at any time after the ten-year term without the making of a termination payment.

Amended Senate Bill 903 also imposes a certification requirement on the financial institution counterparty to the interest rate swap. In entering into an interest rate swap, the counterparty must execute a certification that, among other things, it understands that local government units in Pennsylvania may only enter into swaps to manage interest rate risk or cost, and not for unreasonable speculation, and that the subject swap is entered into only for such permitted purpose. The counterparty must also certify that its pricing of the swap is fair and honest and in line with market standards, and agree to notify the Department of Community and Economic Development (DCED) upon its receipt of a termination payment under the swap.

Finally, amended Senate Bill 903 extends the restrictions on interest rate swaps to the City of Philadelphia and all authorities formed under Pennsylvania law. For authorities, the change is particularly notable, as it marks the first time such entities will have to file with DCED (although they remain free of the filing requirements with respect to the issuance of debt).

Senate Bill 903 as amended was voted out of Committee by a 10-1 margin, with only Senator Michael Stack, the lone Senator on the Committee from Philadelphia, opposed. Municipalities, school districts and their hired professionals should continue to carefully monitor the status of this bill. It is possible that Senate Bill 903 may come up in the Senate for a vote before the end of the year. Municipal officers and representatives are encouraged to contact their financial professionals or bond counsel if they have questions about the local impact of these proposals.

Timothy J. Horstmann is an associate of the law firm of McNees Wallace & Nurick in Harrisburg and practices in the firm’s Public Finance group. The firm represents state and local governments and agencies as issuers of revenue bonds and general obligation bonds. The firm also routinely serves as underwriter’s counsel and counsel to conduit borrowers, banks and trustees.

© 2013 McNees Wallace & NurickLLC
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