Jefferson County, AL Officials Brief Washington On Threat Of $4.6B Bankruptcy On Sewer Bonds

Birmingham, AL (AHN) - As Alabama's most populous county struggles to avoid bankruptcy on $4 billion in municipal bonds, officials in Washington are listening. County financial advisers from Birmingham met Wednesday with officials from the Bush administration and the Federal Reserve and members of Congress have been told that the severe crisis has the power to harm the national economy as well.

Jefferson County is reportedly unable to make its bond payments because variable interest rates have jumped as high as 10 percent and it has not been able to get anyone to refinance its debt at a lower fixed interest rate, according to Bloomberg news reports.

The county has $4.6 billion in debt and if it goes into bankruptcy it would become the country's biggest municipal bankruptcy, according to The Birmingham News.

Jefferson County financial advisors reportedly did not ask for a government bail out as they met Tuesday and Wednesday with Treasury Department, the White House Council of Economic Advisers, the Federal Reserve and with key Democrats and Republicans in Congress.

County officials have been negotiating with Wall Street.

They say the trip was to let federal officials know about the county's problem and how it relates to larger financial markets.

However, the message was clear that a $4 billion loss in the municipal bond could have a ripple effect similar to that of the subprime mortgage market crisis.

Investments in the bond market in general - and specifically municipal bonds - as well as the mortgage market, have traditionally been viewed as safe and have been where people move their money to preserve their invested capital when the stock market becomes volatile. Many pension and 401K plans are also invested in the municipal bond market.

If Jefferson County can't restructure its bond debt, then interest payments on its sewer system debt along might reach $250 million. County Commissioner Bettye Fine Collins told Bloomberg news that amount would be almost twice the $138 in revenue that the sewer system generates.

Compounding the problem is that county sewer rates have increased four-fold since 1997 and county officials don't think residents can pay more. One of the arrangements that county officials are trying to work out would use some of the sales tax that is collected to pay off its school bonds to make up the shortage.