Guaranteed income contracts sounded good when Wall Street's squad of eager investment banks peddled them to Florida counties, municipalities and local agencies.

But now that many of the insurers and investment houses that stood behind these contracts have been downgraded -- or worse yet, are foundering financially -- the fear is that outstanding deals may have to be terminated, costing issuers millions of dollars. And promised returns might not materialize.

Two weeks ago, Moody's Investor Service put 142 bond issues from housing finance authorities nationwide on its Watchlist with negative implications. There are 30 issues from Florida counties, including Miami-Dade and Palm Beach.

The reason for concern: The proceeds from these deals had been invested in guaranteed investment contracts issued by American International Group, the giant insurer bailed out by the federal government. A guaranteed investment contract does just that -- guarantee a certain return for a period of time.

The analysts at the New York rating agency focused on the housing agency issues after AIG was downgraded and its long-term and short-term debt placed on Moody's Watchlist for possible downgrade. The concern is that given AIG's financial woes and lack of capital, the insurer won't live up to its side of the contracts.

THE RISK

Jeff DeCarlo, a partner with Adorno & Yoss in Coral Gables and chairman of the firm's public finance practice group, said the risk in terminating a guaranteed investment contract is that an agency or municipality won't earn the return it had counted on. ''The other risk is that it won't get paid back -- period,'' he added.

David Brandt, interim executive director for the Housing Finance Authority of Palm Beach County, said he is a bit less worried now that the government has stepped in behind AIG.

These guaranteed income contracts typically have been used by public agencies like housing finance or water and sewer or an airport authority to invest money raised by the sale of bonds for construction projects. All the funds usually aren't needed right away. So, the money would be parked in the investment contracts with maturities pegged to when the funds would be needed. The basic goal is to earn a return high enough to cover the debt service bonds, or perhaps a bit more.

There is a 2001 Miami-Dade Housing Finance Authority bond deal on Moody's Watchlist. Rachel Baum, Miami-Dade's finance director, said the county also parked about $33 million from a county water and sewer reserve account in an AIG guaranteed investment contract.

Baum said the county attorney is determining whether AIG would need to post more collateral to back up the investment contract or allow the county to break the contract and recoup its funds.

Helen K. Simon, a finance instructor at Florida International University, said the investment contracts, as well as derivative products like interest rate swaps and credit default swaps, have been popular with public finance officers for more than a decade, but they do carry a risk. ''The more involved they become, the greater chance so many things could go wrong,'' she said.

ADVICE: PLAY SAFE

Other finance experts believe municipalities and public finance agencies should only invest proceeds from bond deals in the safest securities -- U.S. Treasuries -- since these are borrowed funds.

''These guys should be playing Vince Lombardi football -- solid blocking and tackling. They shouldn't be throwing Hail Mary passes,'' said Bruce Forster, head of South Beach Capital, a Miami-based investment banking firm.

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