The MBTA has wasted an estimated $236 million over the last 14 years by investing in financial derivatives known as interest-rate swaps in a misguided effort to protect its perennially troubled financial outlook, a report issued Tuesday by the Pioneer Institute concluded.
Simply put, the Pioneer report said the MBTA has been throwing good money after bad.
This year, the MBTA expects to pay $20.4 million to hedge interest payments totaling $3.3 million.
In other words, the insurance costs six times the value of the asset it is supposed to protect.
The T can't count financial management among its strengths, and the Pioneer Institute says. It distracts from the T's core mission of affordable transit.
"Managing a multimillion-dollar portfolio of financial derivatives is a reckless distraction from that mission," the report says.
Entering into these swap agreements with global investment banks is risky, the report argues, because such institutions are vulnerable to economic shock like recent financial turmoil emanating from China—and this exposure has only increased since the Great Recession.
Interest rate swaps are abstruse financial instruments developed for use by sophisticated international investors. Their unregulated use triggered the 2008 stock market meltdown, which—in turn—marked the onset of the Great Recession, the most severe economic calamity since the 1929.
"Financial derivatives are not an effective long-term hedge in the prevailing economic conditions," the report says.
In 2008, the office of then-state auditor Joseph DeNucci warned the T about the swaps, which it found had cost the transit agency $18 million in premiums and fees from 2000 to 2005.
The report also faults the MBTA's financial reporting, which it says does not provide adequate reasons for holding the swaptions and omitting parts of standard financial reporting like management's discussion and analysis, as well as for a "typographical oversight" that misrepresents interest rates.
Terminating the swaps, which would cost the MBTA as much as $30 million, would be preferable to holding onto them as they cost the T even more money.
As a solution, the report recommends cutting down on swaps and other debt obligations and stockpiling cash to better safeguard against an economic downturn.