PA INDEPENDENT: It all started in 2003 when the state passed a law legalizing interest-rate swap transactions for local governments. Marketed as a way to help local governments manage borrowing costs, swaps are deals made between investment banks and local governments. The parties agree to “swap” interest rate payments – with the local government, for example, paying market-based variable rates instead of a fixed rate. Think of it as sort of an adjustable-rate mortgage.
It backfired on Bethlehem Area School District. Getting out of two of 13 swap agreements cost $10.2 million in 2007.
It backfired on the city of Harrisburg, where at least eight swap transactions contributed in part to $350 million in debt associated with the city’s trash incinerator project… (more)
EDITOR: And it “backfired” on the Lancaster Convention Center Authority which took the gamble to maximize its lending capacity.
The convention center as designed by Cooper Carry is far too much facility for the amount of money that could have realistically been expected from the “hotel tax”. Consequently, the construction debt is so highly leveraged that the only way this integrated facility could have been built is with interest rate swaps.
Now the people who inherited this facility from those who created it are desperately trying to find ways to pay the bills that have come due.