Jefferson County, Take The Money And Run

Legislators in Alabama’s Jefferson County on Wednesday voted 4 to 1 to file for bankruptcy court protection and thereby put in motion what could be the biggest municipal bankruptcy in U.S. history. We hope the state will quickly step in to take over the negotiation – similar to what other state governments (ie, Harrisburg, PA) have done when local officials act like children. The headline risk on events like this can cause the fragile muni bond market to quickly deteriorate.

The right thing to do is for bondholders and the county to work this out. The wrong thing to do is for the county commissioners to in effect to approve a “walk out”. To imply the entire county has no assets to sell off now or in the future is plain silly. How about selling off or privatizing local government assets like city hall, office buildings, vacant land? Or what about securitizing future revenues from parking garage revenue and sales taxes?

There is plenty of time to make annual payouts over the next 30 years. As the economy improves so will Jefferson Country. But to just take the money and run is just plain wrong. Oh and by the way, its illegal.

“I am disappointed by the commission’s decision… as bankruptcy will negatively impact not only the Birmingham region, but also the entire state,” Gov. Robert Bentley said in a statement moments after the County Commission voted. “By filing for bankruptcy, the county commission now relinquishes control of its affairs into the hands of a federal bankruptcy judge,” Bentley said.

Despite a tentative deal with creditors reached in September to settle $3.14 billion of debt, county commissioners this week resurrected the threat of a Chapter 9 bankruptcy filing largely because the estimated savings from the September agreement had shrunk by about $140 million. The filing could add to heightened concerns in the $3.7 trillion U.S. municipal bond market, which has recently been hit hard by the high-profile debt crisis in Pennsylvania’s capital of Harrisburg. Creditors such as JPMorgan Chase & Co and the county in September reached a tentative deal calling for Jefferson County’s sewer-system debt to be substantially reduced, but final terms were not reached.

A sticking point discussed in a commissioners’ meeting on Monday was adjustment of a $140 million difference between the originally agreed-upon $2.05 billion the county must repay the creditors. That figure recently crept up to $2.19 billion. The September agreement was seen as a turning point for Jefferson County, which since 2008 has teetered on the edge of a bankruptcy that would have surpassed that filed by Orange County, California, in 1994. Jefferson County’s debt escalated in the mid-2000s with interest and auction rate bond deals as it sought to refinance an upgrade of its sewer system. Should Jefferson file Chapter 9 bankruptcy, at over $5 billion for the county’s total indebtedness, it will be the largest municipal filing in U.S. history.