Jefferson County, Alabama, Headed For Municipal Bankruptcy

The clock is ticking for Jefferson County, Alabama. Unable to pay $3.2 billion in sewer-system debt bills, Jefferson County, Alabama, Commissioners have until August 29, at which time a forbearance agreement with Wall Street creditors, led by JP Morgan Chase, expires.

The next likely step for Jefferson County is to file for Chapter 9 bankruptcy, a move which will go down as the biggest municipal bankruptcy in U.S. history, surpassing the financial mess and bankruptcy of Orange County, California, in 1994.

As financial troubles go, Jefferson County’s are beyond serious. In 2002, needing to repair an outdated sewer system, local officials were wooed by a group of savvy investment banks to take on a financing arrangement that involved converting the county’s debt from fixed interest rates to adjustable rates and using exotic interest-rate swaps.

The financing plan was supposed to protect Jefferson County from rising interest rates on its sewer bonds. That didn’t happen, and county commissioners were forced to pay interest rates as high as 10 percent.

In the process, the county turned over more than $120 million in fees and commissions to the Wall Street banks that initially concocted the disastrous financing arrangement.

Now unable to negotiate another payment extension with lenders, Jefferson County commissioners are considering filing Chapter 9 bankruptcy. As reported Aug. 26 in The Birmingham News, the county says it fully expects to default on its $3.2 billion sewer debt this Friday. The next step is to authorize attorneys to begin bankruptcy proceedings, according to Jefferson County Commission President Bettye Fine Collins.

Jefferson County’s filing of Chapter 9 would be the largest municipal bankruptcy in the nation’s history. Currently, the record is held by Orange County, California, which declared Chapter 9 bankruptcy on Dec. 6, 1994, following massive losses of at least $1.5 billion from complex investments in financial derivatives. Federal criminal charges eventually were brought against the county’s treasurer at the time, Robert Citron, who pled guilty to six felony counts. Citron was sentenced to five years of supervised probation, and ordered to perform 1,000 hours of community service. He served no time in prison.

According to The Birmingham News, extending the forbearance agreement set to expire on Aug. 29 for Jefferson County means Alabama’s Governor Bob Riley must call a special session of the Legislature to consider property and sales taxes, among other revenue increases. Riley declined to invoke that session because of strong opposition from lawmakers and the public.

If an extension is not signed, Jefferson County faces higher interest costs, penalties and principal payments on its sewer debt.

In the event Jefferson County defaults on its payment obligations as expected, its bond insurers - Financial Guaranty Insurance Corp. (FGIC) and Syncora Guarantee, Inc. - are required to cover the payments under a previous agreement with the county. Both insurers say they expect the county to reimburse those payouts in full, as outlined in that agreement.

If the county cannot honor the agreement, FGIC and Syncora contend they will consider legal action, and sue the county for reimbursement. The county must then either make payments as scheduled or file for protection under Chapter 9 bankruptcy.

David Bronner, who heads the Retirement Systems of Alabama, thinks the county should take the latter step, selling him the sewer system and putting the losses firmly with the bond insurers that he says reaped countless benefits over the years when Jefferson County renegotiated bond swaps in order to get a better - yet more expensive - rate and ultimately created the financial mess it is in today.

In the meantime, Aug. 29 is fast approaching. Unable to pay the piper - in this case, Wall Street banks and creditors - default appears to be the most likely scenario for Jefferson County. For its residents, that unfortunate reality could mean yet another string of troubles - this time in the form of possible tax increases, spending reductions or job cuts.

All of which sounds like a repeat performance of Orange County, California, in 1994. While in bankruptcy, nearly every county program budget was cut, approximately 3,000 public employees discharged and other community services drastically reduced.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

This entry was posted on Tuesday, August 26th, 2008 at 1:35 pmand is filed under Jefferson County. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.