Early last year, Bloomberg Markets magazine reported that scores of Pennsylvania school districts, including several in Butler County, appeared to be victims of bad deals sold by Wall Street investment banks and endorsed by financial advisers. School boards were steered into risky investment vehicles, called swaptions, that are bets on interest rates. Some swaption contract deals wound up costing school districts millions of dollars to terminate.

The scandal also involved school districts entering into deals with Wall Street firms without the benefit of competitive bidding, and as a result school districts often paid too much — in interest and fees.

For the past several years, U.S. prosecutors and the Security and Exchange Commission have been looking into evidence of bid rigging and collusion between investment banks and supposedly independent financial advisers.

A New York Times article last week reported that three federal agencies and a number of state attorneys general are investigating price fixing and collusion related to the issuance of $400 billion worth of tax-exempt bonds. The investigation also is looking into campaign contributions to local officials that appear to have influenced who got the profitable bond business.

The lack of competitive bidding when cities, counties or school districts issue bonds to raise money can cost taxpayers millions of dollars.

Charles Anderson, a recently retired IRS manager in the tax-exempt bond area, told the Times that "pay-to-play in the municipal bond market is epidemic."

Anderson estimated that as much as $4 billion a year was being extracted from states and municipalities in the form of higher prices and higher, often hidden, fees.

While the federal and state investigations are ongoing, the massive fiscal stimulus package being proposed by President-elect Barack Obama is raising new concerns over the evidence of corruption and lack of competitive bidding for tax-exempt bonds.

With the massive federal stimulus package expected to emphasize infrastructure spending, the potential for states, counties and school districts to sign more bad deals is enormous.

In many swaption scandal cases, counties and school districts were told by purportedly independent financial advisers that the deals they were looking at were good — while the adviser and the investment bank apparently colluded and skimmed extraordinary profits.

The municipal bond market operates with minimal federal or state regulation. And the market for the complex financial instruments known collectively as derivatives is not regulated at all.

Some of that is expected to change in the aftermath of last year's financial meltdown on Wall Street and the arrival of a new administration in Washington, D.C., this month. But the warnings from the recent past are obvious.

The New York Times article noted that "irate government officials are finding they may have overpaid for various services and have inadvertently broken federal tax rules. Again and again, proceeds from tax-exempt bonds appear to have improperly generated investment income for banks and insurers."

Before the stimulus plan is approved in Washington, Congress and the Obama administration need to put in place new rules to protect taxpayers when states, municipalities or school districts issue bonds to augment federal stimulus money or raise money independent of federal assistance. And all parties involved in issuing bonds need to take extra care to avoid the overpayments and other negative consequences of noncompetitive bidding and secret deals between bankers and financial advisers. Transparency and competitive bids should be top priorities.

The legal process will continue to follow the evidence related to recent swaptions and bond deals in Pennsylvania and elsewhere across the country. Even without convictions of unethical investment bankers or financial advisers, the evidence is clear enough to cause all issuers of tax-exempt bonds to proceed with extreme caution and skepticism.