Jefferson County, Alabama, may become the largest municipal bankruptcy in history. According to one of our panelists, “Jefferson County has to declare bankruptcy. The county needs protection from creditors, from bankers, from politicians--and from itself.” Having issued $3.2 billion in adjustable-rate sewer bonds, Jefferson County--in an attempt to hedge its interest rate risk--entered into $5.8 billion of interest rate swaps, more than any other U.S. county. This “hedged” position turned into huge losses as a result of financial market illiquidity, and the county now owes banks more than it can pay--an instructive example of how risks can migrate to municipalities. What are the lessons of Jefferson County? More generally, the housing bubble created good times for municipal finances through high property tax valuations and real estate transaction taxes. With the bubble now turned to bust, what other credit issues may emerge in the more than $2 trillion municipal finance sector? These and related questions will be addressed by panelists from the government, media, and private sectors.

This AEI event is cosponsored by the Professional Risk Managers’ International Association.