BRADENTON, Fla. -Alabama Gov. Bob Riley began meeting in person with Jefferson County commissioners last week, urging them to find a solution they can unite behind to resolve the county's $3.2 billion sewer debt crisis that has been the focus of negotiations with creditors for nearly seven months.
"His role in this whole situation is to try to bring the commission together to get [them] on the same page," Riley's press secretary Tara Hutchison said Friday.
The governor also has been speaking with a "majority, if not all" of the county commissioners by phone over the past several weeks, Hutchison also said.
The County Commission is sharply divided on the sewer debt issue that has polarized Alabama's most populous county, which is home to Birmingham.
So far, three commission members, a Republican and two Democrats, continue to oppose filing what historically would be the largest municipal bankruptcy ever. However, several restructuring plans have been negotiated with creditors but all have failed to pass the political test locally or at the state level. And the same commissioners that oppose bankruptcy recently decided to hold a non-binding referendum Nov. 4 asking local voters if they should pay their debts or file for Chapter 9 municipal bankruptcy.
Two Republican county commissioners have joined a growing force of constituents, other elected officials, and local media that support bankruptcy. The Jefferson County Mayors Association last Thursday voted to support bankruptcy if a solution to the financial crisis is not found by Sept. 1.
Meanwhile, forbearance agreements the county entered into with creditors, which have deferred accelerated repayments of some of the debt as well as swap payments, expire on Friday. Those agreements will expire more than two months early because the governor will not agree to call a special session of the Legislature to help the county pass state laws necessary to implement a restructuring plan.
"The date will come and go and it will be up to the creditors to do something," said Jeffrey Cohen, a lead attorney for Cohen & Associates PC in Denver whose work includes municipal bankruptcy and creditor's rights.
Cohen said creditors could go to court and ask a judge to enforce the bond documents.
"The county, under the bond documents, would be forced into increasing the sewer rates," Cohen said. But he does not believe creditors would file a lawsuit because that would ultimately push the county to file for bankruptcy.
However, Cohen believes the county should file for bankruptcy and investors, who want resolution to the months-long debate, have told him they would rather see the county file for bankruptcy at this point, he said.
Cohen suggested that a filing could set the stage in court for negotiating a workout whereby the county would pay its debt but not penalty interest rates and swap default payments.
In an interview with The Bond Buyer, County Commission President Bettye Fine Collins said that restructuring plans the county negotiated included forgiveness of some penalties. But that point has never been mentioned publicly.
"I think filing for bankruptcy is the right thing," Cohen said. "I doubt you're going to have the adverse impact that people are imagining."
A number of people believe Jefferson County will not suffer appreciably from a bankruptcy, including Alabama's pension chief, David Bronner, who has offered to buy the sewer system, but only if the county files for bankruptcy. Others believe Jefferson County and Alabama will suffer and not just from the stigma of filing the largest municipal bankruptcy.
"The biggest problem that will face Jefferson County as well as other Alabama issuers in the face of the county's possible bankruptcy is that the bond insurance market is dramatically weakened in the last year," said Dick Larkin, director of research for Herbert J. Sims & Co.
"In all prior crises, bond insurers were always available with potential credit enhancement to help an issuer with recovery," Larkin pointed out. "That backstop is no longer there, with most insurers already downgraded below Aaa/AAA, or now on a negative watch for possible downgrade."
