Moment Of Truth For Jefferson County’s Sewer Debt
With a 5 p.m. deadline looming for Jefferson County commissioners to make an interest payment on $3.2 billion in sewer debt, Alabama Governor Bob Riley is heading to the negotiating table with Wall Street creditors.
If the governor’s last-ditch effort to strike a deal fails and Jefferson County is unable to extend its forbearance agreement or make a payment, the county becomes left with no alternative but to file the largest bankruptcy ever sought by a municipality.
As reported Aug. 29 in The Huntsville Times, the consequences of a bankruptcy move would not only affect Jefferson County, but potentially the entire state of Alabama.
“The municipal bond market has a long memory and would penalize the county, the state and other Alabama local government jurisdictions, raising borrowing costs for all for many years,” according to Lamont Financial Services Corp., a New Jersey-based company that prepared a recent report for one of the bond insurers involved in the sewer project.”
The Lamont report went on to say that if Jefferson County does in fact go broke, it impairs the state’s efforts to recruit jobs, as well as creates possible interest rates increases on taxpayer debt for public improvements in the future.
If Jefferson County can’t meet its 5 p.m. deadline on Friday and files Chapter 9 bankruptcy, it would join a small roster of municipalities to default over the years. Earlier in the day, the Wall Street Journal reported that since 1934, when the first municipal bankruptcy legislation was passed, there have been fewer than 600 total Chapter 9 filings.
High-Finance Deals
Jefferson County’s financial troubles began innocently enough. In 1996, the county decided to update some 3,000 miles of sewers to stop the discharge of raw sewage into nearby streams. Wall Street banks were called in to devise a financing plan. Using a strategy that involved refinancing fixed-rate bonds into variable-rate bonds and then hedging the debt through complex interest-rate swaps, the plan ultimately went haywire.
Today, more than $3 billion of the bonds, including $2.2 billion of auction-rate securities, have interest rates that reset periodically, leaving Jefferson County unable to pay its debts.
Things are so bad that Jefferson County’s long-term debt-sewer, school and general obligation bonds - is now more than $7,000 for every man, woman and child, according to The Birmingham News. That’s 30 times Mobile’s long-term per capita debt of $236, and 38 times Montgomery’s $186 per capita debt, the paper says.
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