BRADENTON, Fla. - A federal court will hear arguments beginning at 9 a.m. Central Time today over whether Jefferson County, Ala.'s financially troubled sewer system should be placed in receivership.

U.S. District Court Judge R. David Proctor has set aside several days for the proceedings to consider appointing a receiver for the system and its $3.2 billion of debt. Most of the debt is in troubled variable- and auction-rate mode for which soaring interest rates and accelerated payments have pushed the county to the brink of bankruptcy.

The county opposes receivership. However, "a receiver is the only way to resolve the [sewer] system's financial crisis," said a pre-hearing brief by the trustee for sewer debt bondholders Bank of New York Mellon, and Financial Guaranty Insurance Co. and Syncora Guarantee Inc.

FGIC and Syncora insure $1.7 billion and $1.1 billion of outstanding sewer warrants, respectively.

"Discovery revealed the county's egregious lack of action in failing to fix the system's financial condition, when the county knew for over five years the system was not generating enough revenue to pay its future debts," the insurers said in a legal memorandum filed Thursday.

Between 2002 and 2007, the county received at least five different reports informing commissioners that rates needed to be raised and revised to meet future debt service obligations, according to the insurers. "Yet, year after year, the county refused to implement these recommendations," they said.

A number of defaults have occurred and continue under the indenture as a result of Jefferson County's failure to make principal redemption payments due on bank warrants three times this year, the insurers claim. Syncora has made three payments toward the county's sewer debt service and now holds $87.4 million of bank warrants, court documents show.

The county said no default has occurred under the indenture and that it has hired a consultant to review the sewer system and "intends to make a good faith effort to comply with his recommendations," Jefferson's pre-hearing brief said.

Alabama Supreme Court rulings and a constitutional amendment give Jefferson County "the full power and authority to, among other things, set reasonable rates for sewer services, meaning that no power or authority over rates may be vested in a receiver," the county's brief said.

The county also contended that the receivership case has hindered talks by Gov. Bob Riley to strike a deal with creditors to restructure the sewer debt, saying: "This litigation has interfered with and delayed ongoing negotiations and political processes aimed at resolving broader financial concerns facing the county and its creditors."

Jefferson County also argued that a receiver should not be appointed until the court has a chance to hear the county's position on whether "the insurers' liability to the county offsets any liability of the county to plaintiffs."

Jefferson County has filed a counterclaim against FGIC and Syncora claiming they breached their contracts by failing to provide investment-grade insurance. Arguments on the counterclaim have not been scheduled.

In a related action last week, the insurers filed a motion requesting that newly elected county commissioner William Bell be added to the suit. Bell was sworn in last Wednesday. He replaced former commissioner George Bowman.

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