Alabama Lawmakers Leave JeffCo Hanging

BRADENTON, Fla. - Alabama lawmakers went home last Friday without providing financial relief for Jefferson County commissioners struggling to restructure $3.2 billion of troubled sewer debt. Lawmakers also failed to reauthorize an occupational tax that supports more than one third of the county's general fund budget.

Virtually all revenue collections in Jefferson County are down and the government was forced to make unplanned principal payments of $15 million to two creditors that accelerated the repayment of $120 million of general obligation debt because the county's credit ratings have been downgraded.

The county already reduced its budget 10% to begin dealing with reduced revenue and higher GO debt payments, and now plans to cut the budget another 33% in July, August, and September - the remaining three months of the current fiscal year.

Without legislative support to reauthorize the occupational tax, commissioners now hope to overturn a local judge's ruling earlier this year striking down the tax. An appeal to the Alabama Supreme Court is pending.

Although it's feared Jefferson County could become the largest U.S. municipal government to ever file for bankruptcy, some observers believe that Alabama's largest county can continue just as it has for more than a year without filing for protection from creditors. Jefferson County's attorneys were ordered to prepare bankruptcy papers last year as negotiations with creditors dragged on.

A number of attorneys across the country who could speak to the pitfalls of municipal bankruptcy haven't been able to because they represent various parties with ties to Jefferson County, including investors in the county's non-sewer debt.

Jefferson County had asked the Legislature to pass bills that would have allowed the county to redirect excess collections of a local one-cent sales tax dedicated by state law to education needs to restructure sewer debt. Those bills died a week before the end of the legislative session.

When asked what the commission would do without the bills, Commissioner Shelia Smoot said, "We'll keep on paying what we can pay and continue negotiating with our creditors. We're not throwing in the towel." She and two other county commissioners remain adamantly opposed to bankruptcy.

The excess sales tax revenue was believed to be the only source of unencumbered funding available to help the county restructure the variable- and auction-rate sewer debt into fixed-rate bonds.

Smoot said the county didn't have a backup plan.

There's still the possibility that the governor would call a special session of the Legislature to help Jefferson deal with its financial crisis, Smoot said, but she also felt that the county would have to go back to the drawing board and try to come up with another revenue stream.

Smoot said she still hopes that the federal government will provide some kind of assistance, such as a backstop, that would be necessary for Jefferson County to complete the restructuring.

"I'm putting out an all-out plea to the White House ... because the people who are suffering the most are not the banks involved, they are the people who cannot pay their sewer bills," said Smoot, a Democrat, who plans to run for the seat being vacated by U.S. Rep. Artur Davis, who announced recently that he planned to run for governor in 2010.

As the county tries to focus on balancing its budget, its bond insurers and the trustee for bondholders are seeking a receiver to take over the sewer system.

The federal judge in the lawsuit filed by creditors held a conference call on Monday, but the results have not been made public. The judge has already said that a receiver - if he decides to appoint one - will not have the power to raise sewer rates.

"Receivership does not mean rates will increase," Smoot said. "The bottom line is even if we're getting a receiver that doesn't mean anything."

Smoot is not the only person who believes Jefferson County can continue on the same course it has been for well over a year, even if a receiver is appointed, and even if creditors and swap counterparties do not renew swap and debt forbearance agreements that are set to expire May 29.

"I don't expect [Jefferson County] to file for bankruptcy now if they don't have to raise their rates," said Jeffrey Cohen, with Cohen & Associates PC, a Denver law firm whose practice includes municipal bankruptcy.

Cohen said bondholders are only entitled to the revenue of the sewer system, and cannot force the county to contribute any other revenues or raise sewer rates.

"If you don't care about repaying your debt then don't file for bankruptcy," he said. "If you want to order your affairs and make sense of the [sewer] obligations you've got, then filing for bankruptcy makes sense. But if you don't want to deal with the issue, don't, because no one is going to force you to raise rates."

Cohen said he continues to believe that bondholders' rights are restricted by Alabama's constitution, which gives Jefferson County the sole right to increase sewer system rates. He believes that was not revealed in bond documents.

"The bondholders have very limited rights now," he said. "They've done everything they could to enforce their legal rights, which isn't very much."

From the viewpoint of investors, Cohen said filing for bankruptcy could actually help Jefferson County's reputation at this point, particularly since most - if not all - of its debt is rated below investment grade.

Bankruptcy "forces the county to take a position and propose a plan of debt repayment," he said. "Right now the county doesn't want to have a plan of debt repayment."

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