In 2001, the Delaware River Port Authority traded much of its staid, old-fashioned debt for an arcane financial arrangement that paid $42.5 million up front.

When the DRPA got the payoff, its chief financial officer at the time, Marc Krassan, told an international financial magazine: “It’s almost like free money.”

The DRPA spent the cash on economic development projects – expansion of the Camden aquarium ($5.3 million), a study for expansion of the Convention Center ($2.5 million), the Army-Navy football game ($250,000), and scores of others.

That “free money” has turned out to be very expensive for the DRPA and motorists, who fund the agency through their bridge tolls.

The 10-year-old “interest-rate swap options” have required the DRPA to pay, in addition to interest and principal payments on the borrowed money, $70.6 million to lenders and insurers since 2006.

And the DRPA is on the hook for 14 more years of underwriting payments that currently cost about $11 million a year.

An interest-rate swap is an agreement between an agency and an investment bank to exchange one stream of interest payments for another over a set period. They usually involve the exchange of a fixed-rate payment for a variable-rate payment.

“They’ve been nothing but trouble,” said the DRPA’s current chief financial officer, John Hanson, who was not with the agency when the deals were made. “This was indicative of decisions being made with some sense of urgency to get the money.”

Krassan, who made the deals, is now principal auditor for Burlington County, where he works with county administrator Paul Drayton Jr., the former DRPA chief executive.

Krassan did not return calls this week seeking comment.

The DRPA has sworn off making swap deals, but the agency is still paying the price for the old ones.

Since 2003, when the agency’s current chief executive, John Matheussen, was appointed, Hanson said “the approach has been to stick to the fundamentals” and avoid risky financial plays. The DRPA board in 2009 ordered the agency not to enter into any more swaps and to try to get out of the existing ones.

The DRPA is $1.4 billion in debt, and the costs coming due because of the 10-year-old deals take money that could go for bridge repairs or other capital costs.

The agency pays about $3.3 million monthly in “swap interest payments” to UBS, the Swiss bank that made the 2001 deals. And it pays about $900,000 a month to banks for letters of credit to insure the swap payments.

The costs are among the biggest the DRPA faces. By comparison, it pays about $2.8 million a month for replacing the deck of the Walt Whitman Bridge. The DRPA’s entire monthly payroll is about $2.5 million.

Like many public agencies, the DRPA was drawn to the swap deals as a way to cash in on lower interest rates and generate instant cash.

In May 2001, it entered into two agreements with UBS involving $761 million of the DRPA’s debt. The arrangement involved refinancing bonds the DRPA had issued in 1995 and 1999 and giving the bank the option to exchange interest-rate payments with the DRPA, starting in 2007.

In return, the DRPA immediately collected $42.5 million from UBS.

In some ways, it was like a homeowner refinancing his mortgage at a lower rate and collecting the projected savings in a lump-sum payment.

But instead of saving the money or using it to pay off bills, the DRPA put the money in its “economic-development” fund for use on both sides of the Delaware River.

The money went to 119 projects, including the aquarium, the Convention Center, the USS New Jersey battleship, public relations, PATCO’s 40th anniversary celebration in 2009, and ads in local media, including The Inquirer. Some of it was still being spent as recently as two years ago.

After the national financial collapse of 2008 exposed the DRPA and others to millions of dollars of unexpected losses, the agency began to get out of its existing swap deals.

It paid $47 million to terminate $174 million of the swap agreements and an additional $7.5 million to refinance some of the debt.

And since 2008, it has paid $24 million for letters of credit from banks to guarantee its continuing swap payments. Because the swap agreements don’t expire until 2025, the DRPA faces 14 more years of the letter-of-credit payments.

Two years ago, one DRPA board member, Pennsylvania Auditor General Jack Wagner, prodded the board to forbid further use of swap agreements.

“Swaps are nothing more than a form of gambling with public funds,” Wagner said in a letter to Matheussen, urging the ban. “I am very concerned about the impact of this toxic product on the taxpayers and toll- and fare-paying travelers of both Pennsylvania and New Jersey.”

On Dec. 28, 2009, the board approved Wagner’s resolution. It directed the agency not to enter into any more debt-related swap agreements and to “take all steps necessary to immediately begin the process” of trying to terminate existing swaps.

The DRPA has spent about $21 million since then in costs related to existing swaps.

Contact staff writer Paul Nussbaum at 215-854-4587 or pnussbaum@phillynews.com.