It Might Be a Good Time To Dig a Septic Tank

Jefferson County failed to find buyers for sewer debt for the second time last week, meaning interest charges could increase as much as $5 million a month.

A Wall Street auction on $784 million of Jefferson County sewer debt failed last week, pushing interest charges the county must pay each month as much as $5 million higher, a county financial disclosure revealed Wednesday.

The county’s so-called “auction-rate securities” failed to attract buyers at a Feb. 14 auction, causing interest rates on various portions of the debt to increase from 2.08 percent to between 3.08 percent and 10 percent, according to the disclosure document to be distributed to county commissioners today.

It marked the second time this month that Jefferson County has failed to find buyers for auction-rate bonds, causing monthly interest payments to soar, as the fallout from the nation’s subprime mortgage crisis spreads into other credit markets such as municipal bonds.

That $5 million is on top of a $7 million increase earlier in February.

Earlier this month, the interest rate on $221.3 million in sewer bonds increased to 10 percent, from 3.06 percent in January. That transaction cost the county an extra $7 million a month in interest payments.

And it’s only going to get worse:

The substantial increase in interest payments likely will cost taxpayers and sewer rate payers tens of millions of dollars extra this year and has the county studying all options, ranging from restructuring its debt to selling the sewer system to, as a last resort, reorganization under bankruptcy laws.

The county was paying about $11 million a month in interest on its total debt. The auctions that have failed so far could boost that amount to as high as $23 million a month with increasing interest rates.

The rates likely will continue to rise throughout the year, according to the document. [emphasis mine]

County commission members aren’t supposed to be talking about any of this right now, but ratepayers will likely get the message loud and clear in their upcoming sewer bills.

4 Responses to “It Might Be a Good Time To Dig a Septic Tank”

  1. ShavenYak says:

    The main thing scaring buyers away from the auction-rate securities market is concern for the ability of the insurance companies to remain solvent if borrowers default. Many of these same insurance companies are underwriting mortgage securities and are tainted by the subprime mortgage market. So folks on the Jefferson County sewer system, the blame should not be laid so much on the county commission or the sewer system, but on mortgage lenders and the people they suckered into buying more house than they could afford.

    On the bright side, if you have a brokerage account with Fidelity or Citibank (and some others, but those are the two I know of), you can invest in these securities and possibly have 10% returns for a short period of time. I think these particular issues have minimum investments of $25,000. I don’t think the sewer system is at a particularly high risk of defaulting, what will more likely happen is they will refinance the debt into fixed-rate bonds as soon as possible and call the auction-rate securities, at which point you would get back your money (ARSs always trade at par value, so you could only lose principal in the event the issuer defaults – and even then, most are insured, and the insurers haven’t failed yet). Please note, I am not a financial advisor, there is a degree of risk involved, your mileage may vary, buyer beware, etc. !

  2. If I’m not mistaken (and I am no economist) the County Commission did take a risky route to finance these bonds, by going with auction-rate securities in the first place. I don’t really blame them – they probably got taken for a ride by their advisers. But I know one thing – the list of things that has happened that “no one could have anticipated” has gotten so long that it seems we have been advised either by idiots or villains.

  3. ALmod says:

    In lay terms… The county took out an adjustable rate loan. It was a dumb idea for home buyers, and it was a dumb idea for the county commission. I don’t know of one person who hasn’t regretted getting an adjustable rate.

    But the REAL thing that bothers me is how the county commissioners are being told to keep their mouths shut. I could be mistaken, but that seems to me to be a very brazen violation of the open records laws.

  4. Kathy says:

    Along with the structure of the debt, there’s also the amount:

    “Jefferson County has about $4.6 billion in total debt, one of the nation’s highest totals for a municipality.”

    We are screwed.

    ALMod, fortunately most of our commissioners are congenitally incapable of keeping their mouths shut. :)

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