By William Selway and Martin Z. Braun
April 10 (Bloomberg) -- Financial advisers for Jefferson County, Alabama, met yesterday with Bush administration and Federal Reserve officials as the county contends with rising borrowing costs that have pushed it close to bankruptcy.
The advisers for Alabama's most-populous county were in Washington to keep federal officials informed of its negotiations with creditors, U.S. Representative Spencer Bachus said. He said the meetings weren't an attempt to arrange a federal bailout.
``It appears Jefferson County is working diligently to negotiate a settlement and avoid bankruptcy,'' Bachus said in a statement. ``Activities in these markets can move very rapidly, so it is prudent that appropriate federal officials be informed of the Jefferson County situation.''
Jefferson County, home to Birmingham, is reeling from interest rates on variable-rate bonds that jumped as high as 10 percent when the auction-rate securities market collapsed and the county's bonds, backed by ailing insurers FGIC Corp. and XL Capital Assurance, were shunned by investors. Without restructuring its bonds, interest costs on its sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, according to county Commissioner Bettye Fine Collins.
The county's financial problems have been compounded by $5.4 billion of interest-rate swaps with JPMorgan Chase & Co., Bank of America Corp., Bear Stearns Cos. and Lehman Brothers Holdings Inc. that were intended to shield it from higher borrowing costs.
Swap Collateral
The floating rates it pays have climbed while the variable rate banks pay the county under the agreements has declined, pushing costs higher. A series of credit-rating cuts require the county to post some $180 million in collateral it doesn't have.
Jefferson County has proposed using some of the sales tax it collects for its school bonds to make up for some of the sewer system's shortfall, though it has yet to reach an agreement with creditors. County officials say they can't burden residents with higher sewer rates, which have risen more than fourfold since 1997.
The county last month reached an agreement with eight banks to delay until April 15 the repurchase of $53 million of its $847 million variable-rate sewer debt from banks. The banks had agreed to act as buyers of last resort for county bonds that weren't wanted by investors.
Extension Sought
The county is negotiating with creditors to extend that agreement.
``We're talking about extending the forbearance term, which we can do under the documents, but we don't have any specific agreement on that,'' said Patrick Darby, a lawyer representing Jefferson County.
Jefferson County's advisers met in Washington with officials from the U.S. central bank, the Treasury Department and the president's Council of Economic Advisers, Darby said.
County commissioners have said bankruptcy may be an option if it can't reach an agreement with creditors. It would be the largest municipal bankruptcy by the amount of outstanding debt, eclipsing Orange County, California.
Orange County, home of the Disneyland resort and the fifth most-populous county, became the biggest municipal bankruptcy in 1994 after then-Treasurer Robert Citron made a wrong-way bet on interest rates.
Wrong-Way Bet
Citron used money in the county's investment pool to bet on the direction of interest rates by purchasing longer-maturity derivative securities. The strategy, which generated high returns initially, backfired as rates rose in 1994, resulting in losses of $1.6 billion. A derivative is a financial contract whose value is derived from stocks, bonds, currencies or commodities, or linked to events such as changes in interest rates or the weather.
Jefferson County Commissioner Jim Carns, who oversees the sewer system, said he is hopeful the county can avert that.
``We're still working hard to come to the very best win-win conclusion,'' Carns said. ``I certainly don't want bankruptcy. It's obvious that if everything fails that that is a possibility. But I'm certainly not willing to say we're at that point, or anywhere near that point.''
Jefferson County has issued $847 million of floating-rate sewer bonds and has liquidity agreements with eight banks including JPMorgan, Bank of America and Societe Generale. It also has about $2.2 billion of auction-rate securities, long-term debt whose interest rates are set every 7, 28 or 35 days.
Sales Taxes
County officials have offered to add at least $27 million in sales-tax receipts to the $115 million generated annually by the sewer system to help pay off the debt.
The plan, which calls for redirecting sales-tax revenue collected for the repayment of school construction bonds that isn't needed for that purpose, requires legislative approval.
County officials, in discussions with banks, ruled out raising sewer rates, saying they were already too high. Sewer charges in the county have increased 329 percent since 1997 to about $62.90 per month for the average residential customer, after a federal court ordered the county to rebuild and expand its sewer system to meet environmental standards.
The county also rejected sales or property tax increases to cover the obligations.
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