New Jerseyans are paying $657,000 a month to the Bank of Montreal for bonds that were never sold. Back in 2004, New Jersey planned to issue a $250 million bond to be sold in 2007. To save money, the state sought to lock in a lower interest payment on the bond issue, and entered into an interest rate swap agreement – exchanging a variable rate for a fixed rate on a set amount of debt to protect against rising borrowing costs. The problem: the interest rate swap contract was signed and the state decided not to issue the bonds.
The Delaware Port Authority made two such agreements in 2000 and 2001, securing $45 million for which it now faces a $242 million liability. When the deals were made variable rates on notes were lower than fixed rates. The collapse of the financial markets exposed public authorities to “unanticipated risks.” Therein lies the problem. It is not the fault of financial instruments but bad fiscal practice: the tendency of governments to assume away risk and favor unrealistic scenarios.
Pennsylvania State Rep. Gordon Delinger would like to ban them. A total of 107 school districts and 86 other local government bodies entered into swaps in recent years. In the case of one Bethlehem school district it’s a decision that has tacked an additional $15.5 million bill for local taxpayers.