Jefferson County: Alabama Governor Joins Bankruptcy Negotiations
Jefferson County, Alabama's $3.2 billion sewer debt crisis is set to begin a new chapter. After stalled negotiations with JP Morgan Chase and others to restructure its debt obligations, Jefferson County Commissioners are filing the necessary paperwork for Chapter 9 bankruptcy protection.
Jefferson County commissioners debated the bankruptcy move for weeks. Finally, facing ongoing backlash from residents over water rate increases and continued downgrades by credit rating agencies, the Commission agreed in a 4-0 vote on Aug. 26 to have the county's new lawyers, Bradley, Arant, Rose and White, take over negotiations with Wall Street creditors and file Chapter 9 bankruptcy if a resolution cannot be reached within the next 48 hours.
Alabama Governor Bob Riley apparently is joining the new law firm for the negotiation talks.
In addition to severing ties with its lead financial advisor, Bill Slaughter, the Commission fired Morgan Keegan & Co., Sterne Agee & Leech Inc. and Citigroup
.According to Bettye Fine Collins, president of the Jefferson County Board of Commissioners, one plan that is on the table for discussion involves exchanging current bonds that have high, variable interest rates, for new bonds with a lower fixed rate of interest. As reported Aug. 27 in The Birmingham News, if approved, the plan requires the consent of the bondholders, but would relieve the county from having to raise extra tax revenues to raise new money to pay off the debt.
“I think Wall Street has to face reality,” Collins said in The Birmingham News article. “They can make drastic concessions. Every man, woman and child is affected by this, and the state of Alabama is affected by this. We have tried our best to avoid it.”
However, should Jefferson County restructure its payment obligations under the protection of Chapter 9 bankruptcy as expected, it will then claim the dubious distinction of being the most indebted municipality in the nation, breaking a previous record of $1.7 billion set by Orange County, Calif., in 1994.
On Tuesday, commissioners received yet another wave of bad news: Standard & Poor's lowered its underlying ratings on Jefferson County's general obligation bonds to “junk” status, suggesting the likelihood that the county will indeed file for bankruptcy.
Where It All Went Wrong
Jefferson County's financial predicament dates back to 2002, when it was forced to renovate a substandard sewer system that had been dumping raw sewage into nearby water beds.
County commissioners sought the help of several Wall Street banks - led by JP Morgan Chase - to devise a financing plan for the new sewer program. It was a move that ultimately would prove disastrous. Acting on advice from the banks' advisors, county commissioners turned to the bond market for their money, refinancing fixed-rate bonds into variable-rate bonds and hedging the debt through complex interest-rate swaps.
The arrangement failed miserably. More than $3 billion of the bonds, including $2.2 billion of auction-rate securities, have interest rates that reset periodically. When the subprime mortgage crisis erupted and the credit crunch ensued, the market for auction rate securities seized up. Interest rates on the sewer debt then skyrocketed, leaving Jefferson County unable to meet its payment obligations.
Adding to Jefferson County's financial insanity is the actions of local elected officials. As reported Aug. 15 in Time magazine, federal investigators have uncovered numerous corrupt deals involving the sewer project, with Jefferson County political leaders suspected of steering investment business to friends in exchange for kickbacks.
Last year, former Commissioner Chris McNair, who oversaw Jefferson County's sewer work from 1996 until his resignation in 2001, was charged with bribery and sentenced to five years in prison. Other county officials, including former commissioner and now mayor of Birmingham Larry Langford, remain under suspicion.
In the end, it's the residents of Jefferson County who have suffered the most from the sewer project's mismanagement and shady business deals. Water rates have gone up more than 300% since 1997, with the average customer now paying nearly $70 a month.
And now more trouble may be looming. While declaring bankruptcy allows the county time to get it financial house in order and put interest payments and lawsuits on hold, the move is not without consequences. Jefferson County's reputation, not be mention its future financial stability, will be negatively affected for years to come. More important, the residents of Jefferson County - already burdened from years of sewer rate increases - could face a whole new set of problems, including higher taxes and fewer city resources.
Jefferson County is classic example of what happens when irresponsible borrowing, corruption, government mismanagement and exotic Wall Street financing collide. Moving forward, transparency and accountability must become the new mantra in Jefferson County. In the 2009 regular legislative session, a county manager bill is set to be reintroduced to make sure this happens. The bill would appoint a professional to supervise the daily operations of the Jefferson County Commission, ensuring more transparency and desperately needed oversight of future policies and practices.
Jefferson County residents deserve nothing less.
Our affiliation of 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.
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