Bond Insurers Sue Jefferson County Over Sewer Debt Bills
Unresolved financial issues over a $3.2 billion sewer debt in Jefferson County, Alabama, have caused the project’s bond insurers - Syncora Guarantee and Financial Guaranty Insurance Co. - to file a lawsuit in U.S. District Court in Birmingham and ask the judge to strip Jefferson County Commissioners of their duties and appoint an independent receiver to take charge.
The lawsuit is the latest controversy in an ongoing battle between county commissioners and creditors over how to resolve Jefferson County’s outstanding sewer debt obligations. In August, Alabama Governor Bob Riley convened a meeting with the county’s creditors in which he offered a plan to restructure the debt at a lower, fixed rate over a longer term. The banks, led by JPMorgan Chase, agreed that the county could delay interest payments on the debt until the end of September.
Now that deadline is fast approaching. If a resolution is not reached soon, Jefferson County will be forced to declare Chapter 9 bankruptcy. It would be the biggest bankruptcy by a municipality government since 1994 when Orange County, California, filed for protection from a $1.7 billion debt.
For years, the sewer project in Jefferson County has been an ongoing source of frustration for Birmingham residents. A combination of risky financing arrangements and complex interest-rate swaps ended up creating a fiscal nightmare for local officials, with sewer debt payments spiraling out of control and residents forced to pay sewer rates that have gone up nearly 330% since 1997.
More troubles unfolded when local officials - including Birmingham Mayor Larry Langford - were accused of accepting money under the table in exchange for awarding bonds and swaps businesses when Langford headed the Jefferson County Council. At least two lawsuits also have been filed against banks by taxpayer groups.
In 2007, former Jefferson County Commissioner Chris McNair, who oversaw the county’s sewer department, pleaded guilty to conspiracy and bribery for accepting money from a contractor.
In a related development, Standard & Poor’s Ratings Services recently lowered its rating three notches on some of Jefferson County’s sewer bonds. According to a statement from the agency’s credit analyst, the downgrade reflects the likelihood that the county will be unable to meet its future payment obligations.
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.
