Jefferson County goes kaboom
Crushed by sewer debt and stripped of 48 percent of its general fund revenues by a state court, Alabama’s Jefferson County filed the largest municipal bankruptcy in history yesterday. The filing brings three years of financial chaos to an end and represents the largest default of municipal bonds and derivatives ever.
It’s been a long road for the county. In 1996 a federal judge ordered it to upgrade its sewer and waste water systems. To comply with that mandate, Jefferson County has issued over $3 billion in sewer debt, some of which was done in a blatantly illegal manner. The former Birmingham mayor and county commission president are now serving prison terms for bribery. Twelve others were convicted of bribery and conspiracy, and over twenty people involved in construction of the project have served jail time. The lead underwriter of the sewer debt, JP Morgan, also made the largest derivatives-related settlement with the SEC for an illegal payments scheme, although the bank admitted no fraud.
Jefferson County has been the poster child for muniland corruption for years as its residents have born the cost of the illegalities. Sewer rates have been raised 329 percent in the past decade. 500 county employees have been terminated. The county’s reserve funds have been depleted. Because of the crushing cost of the fraud the county has nowhere to turn but to the protection of federal bankruptcy court. With this filing, the county brings all court cases it is facing to a standstill and can halt debt payments until its massive liabilities have been adjusted.
The county commission has been working intensely with its creditors since August when they postponed filing for bankruptcy at the last minute at the request of the governor. The governor promised to convene a special session of the legislature to give the county the right to raise taxes to cover its massive revenue shortfalls and create a state guarantee for new bonds issued by the county. The governor said recently though that he would not convene this special session until all creditors had agreed to the proposed terms. According to the bankruptcy petition, some of the sewer debt has been sold to new parties, which has complicated negotiations. Bloomberg reported:
The county’s bankruptcy attorney, Kenneth Klee, said the filing was necessary because talks with creditors and the receiver in charge of the sewer plant broke down.
“There was an impasse reached,” Klee said in an interview today. “None of the creditors — zero — signed up to the deal that we have been negotiating for six weeks.”
Alabama Governor Robert Bentley, is not happy with the county’s bankruptcy filing and said in a statement published by Reuters:
I am disappointed by the commission’s decision today as bankruptcy will negatively impact not only the Birmingham region, but also the entire state.
The governor has suggested that if Jefferson County filed bankruptcy it would raise the cost of issuing new debt for other Alabama municipalities. When I asked Paul Maco, a partner at the law firm Vinson Elkins and former head of the SEC’s Municipal Securities office, about the market effects of Orange County’s 1994 bankruptcy filing, he said there had not been major disruptions for other California issuers. Maco suggested that bond market participants could discern if complications for one issuer would spill over to similar issuers. I think the governor’s fears are misplaced. Bond markets have been watching the situation in Jefferson County closely for several years and know how unique their circumstances are.
The Jefferson County commissioners took a brave step today on the long road of returning their community to fiscal soundness. Jefferson County’s situation represents the confluence of corruption, burdensome environmental constraints, general mismanagement and bad luck — it’s been a costly experience.
Birmingham News: Timeline: How Jefferson County’s financial crisis unfolded
SEC: J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal Payments Scheme
Riski: Backgrounder on Municipal bankruptcy