Executive Summary
Across the country, the state and local budget crises have hit public transit agencies very hard. As public officials try to cope with record revenue shortfalls caused by the economic crisis created by the banks, public transit is on the chopping block. In city after city, transit riders are facing fare hikes and service cuts. But while riders are forced to bear the costs of solving transit agencies’ budget problems, the big banks on Wall Street are gouging many of these same agencies and the governments that fund them for more than half a billion dollars each year through toxic deals known as interest rate swaps.
OFF THE RAILS.
Wall Street banks sold these swap deals to state and local governments and transit agencies as a way to save money and lower borrowing costs. However, when the banks crashed the economy in 2008, the federal government aggressively drove down interest rates as part of the bank bailout. These artificially low interest rates have changed the math on these deals, and governments and agencies are now losing millions of dollars every year as a result. The banks are reaping a windfall at taxpayers’ and riders’ expense, and it is a direct result of the bailout-era interest rates.
THROWING RIDERS UNDER THE BUS.
We have identified a dozen places around the country where banks have entered into toxic swap deals directly with transit agencies or with the governments that provide substantial funding to them: Baton Rouge, Boston, Charlotte, Chicago, Detroit, Los Angeles, New Jersey, New York, Philadelphia, the San Francisco Bay Area, San Jose, and Washington, DC. In these 12 places alone, banks are overcharging taxpayers and riders $529 million a year.
JUMPING THE TURNSTILE.
Furthermore, there have been widespread reports recently that several banks may have been colluding to manipulate interest rates downward, causing governments and agencies to lose even more money on these deals. Global financial regulators have opened investigations into this issue, and the City of Baltimore is the lead plaintiff in a federal class-action lawsuit claiming that municipalities’ losses on these swap deals were magnified as a result of this alleged manipulation. This alleged fraud could have cost just the transit agencies and governments covered in this report more than $92 million.
PULLING THE EMERGENCY BRAKE.
Banks need to renegotiate these deals with our governments and transit agencies to save taxpayers and riders millions of dollars each year. Across the country, in places like Massachusetts, Pennsylvania, Los Angeles, and Oakland, state and local officials have called on public entities to renegotiate or get out of these swap deals. Furthermore, there are already examples of places where banks have agreed to renegotiate swaps with public bodies to save taxpayers money, so we know that this can be done.
GETTING BACK ON TRACK.
Our public officials are faced with difficult choices as they try to fill vast budget holes that grow bigger by the day as the Great Recession wears on. But it is a mistake to balance those budgets on the backs of transit riders and taxpayers, while bleeding away millions of dollars a year to the same banks that caused the economic crisis. It is time to get our priorities in order. We cannot keep robbing working families to pay the rich bankers on Wall Street. We need to make banks renegotiate these toxic interest rate swap deals to save taxpayers and riders more than half a billion dollars annually.