Jefferson County: A Costly Lesson In High Finance
Jefferson County, Alabama, serves as a prime example of Wall Street financing gone bad. Money troubles for the county, which is home to the state’s largest city, Birmingham, began in 2002. It was then that several Wall Street investment banks, including JP Morgan Chase, devised an elaborate financing arrangement to pay for the county’s new sewer system.
The $5.8 billion arrangement that JP Morgan and other banks designed for Jefferson County was a risky venture - and one that rejected fixed-rate debt and borrowed at variable interest rates using interest-rate swaps. Failing to anticipate a future credit crunch, the plan backfired miserably. More than $3 billion of the sewer bonds have interest rates that reset frequently, with rates going as high as 10 percent.
Today, Jefferson County is on the brink of financial disaster. By some reports, the county has become one of the most indebted municipal governments in the history of the United States, with a current debt of approximately $9,000 for each resident in the county.
Meanwhile, the Wall Street banks that arranged the initial financing deal for Jefferson County have been rewarded to the tune of $120 million in fees and commissions - six times the standard rate.
Faced with few options to resolve its $3.2 billion sewer debt crisis, Jefferson County is now looking at filing Chapter 9 bankruptcy. In doing so, the county would be able to hold off paying banks and creditors while it figures out a restructuring plan for its debts.
On August 15, David Bronner, head of the Retirement Systems of Alabama, said his pension fund would be willing to buy the sewer system for up to $1.4 billion. The deal would require the county to file bankruptcy but essentially leave banks, investors, and insurers with the losses.
Bronner says in seven years he would sell the sewer system back to the county for the same price he initially paid.County commissioners are debating Bronner’s proposal. Some says the move could potentially create even more problems for Jefferson County, including tax increases, job losses, and lessen its ability to finance future infrastructure projects.
On Aug. 1, Jefferson County succeeded in winning a fourth forbearance agreement from the various Wall Street banks. In the end, however, many say the county is simply prolonging the inevitable fate of bankruptcy.
Until then, Jefferson County’s reputation is on the line. As a steward of taxpayers’ money, its future decisions have monumental consequences - and serve as a costly lesson for other municipalities to learn from.
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