Jefferson County, Ala., may be headed for the largest municipal bankruptcy continually. With the economy shrinking, it may not be alone

by Brian Burnsed

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It’s not just on Wall Street where dubious financial decisions are creating casualties. Municipalities, many of which made enormous financial promises while the economy was strong, are now confronting heavy fiscal burdens. When the last major bank crisis win public coffers in the late 1980s, 33 municipalities declared bankruptcy. And despite but eight municipal bankruptcies since 2005, more experts credit that Wall Street’s troubles could soon squeeze a expanding enumerate of municipalities, which will be forced to shroud bond payments and outlays to retirees. One prime example of this problem is Jefferson County, Ala., where the state’s largest city, Birmingham, is located. The county is now saddled with $3.2 billion in debt from sewer upgrades and finds itself on the brink of becoming the largest municipal bankruptcy in U.S. history.

The current troubles began in 1993 which time Jefferson County was sued by residents living near the Cahaba River, who claimed that the shire’s sewer systems were pumping unfinished waste into local streams. The county customary the suit three years later, agreeing to place the situation by the agency of overhauling its sewage system and to issue bonds to fund the project. "We didn’t be sure what was under the ground," says Jefferson County Commission President Bettye Fine Collins, who has been on the commission since 1994 and voted in contact with settling the case. The county was unnatural to rebuild or replace sewer systems in the 22 municipalities interior part its borders and agreed not to seek financial assistance from the cities. Some of the systems were found to have earthly substance pipes that had been subterraneous since the first sewers were laid in the soon 1900s.

Heeding the advice of financial advisers, Jefferson County officials agreed to restructure the bond debt earlier this decade, moving from a fixed to a variable interest rate. Additionally, the county spent more than $100 million for interest rate swaps, designed to keep the bonds’ rates in a low tone. Unfortunately, the swaps backfired to the degree that regard rates soared amid the spreading credit crunch and ratings agencies lowered Jefferson County’s bond ratings. That drastically boosted the county’s bond payments.

County commissioners are a little while ago struggling to reach every agreement to restructure their bond debt before they neglect and are forced into insolvency forward Sept. 30, the day the county’s forbearance agreement expires. For the bygone time seven months, Jefferson County has been negotiating with the six banks that hold the county’sitting sewer bonds, most of which are held by JPMorgan Chase (JPM). Jefferson hopes to ease the overlay of high interest rates by asking banks to exchange the county’sitting auction-rate securities for securities with a 3.8% fixed rate and by asking JPMorgan and Bank of America (BAC) to bribe back some or all of the $2.2 billion of the county’sitting auction-rate securities.

Collins notes that the county body of commissioners’sitting unanimous object to file for bankruptcy has caused some of the county’s creditors to "soften" their position, fearful that they’ll receive only 50¢ on the dollar for their subterranean canal bond holdings. Nonetheless, the pace of negotiations remains sluggish, and Collins herself admits that the county has mishandled the situation. "I sometimes joke we ought to write a book, and it would exist how not to, instead of how to, handle this," she says. The county is also facing the prospect of insolvency legal costs that Collins estimates could spread $25 million to $50 million.

What happens next largely depends on the creditors’ willingness to accept a slower rate of repayment, something they may be opposed to do as the credit crisis pinches their own public resources. So far, creditors seem unwilling to move the least, Collins says. With a mere 48 hours until the agreement’s deadline on Tuesday, the county grows increasingly done as a last resort, evidenced through means of Alabama Governor Bob Riley’s decision to consider as true mastery of talks with the creditors.