BRADENTON, Fla. — Jefferson County, Ala.’s decision to skip general obligation warrant payments is yet another example of a troubling trend in municipal finance — the unwillingness to pay debts even when funds are available, observers said.
In February, the Stockton, Calif., City Council voted to declare a financial emergency and suspended payments toward general-fund-supported bonds through June 30, the end of the fiscal year.
Two weeks ago, Harrisburg, Pa’s state-appointed receiver announced the city’s intention to skip GO bond payments.
Jefferson County said Wednesday it would stop making payments on its insured GO warrants to preserve cash for essential services. The county projected that it would have less than $7 million in reserves by Sept. 30, the end of the fiscal year, if bond payments continued.
“This tells me they had the money but not the willingness, an attitude emboldened by Stockton’s decision to skip debt service payments followed by Harrisburg receiver’s decision to default on its March 15 GO debt payment,” said analyst Alan Schankel, managing director at Janney Capital Markets. “If deciding to skip debt service even when resources are available becomes a trend, it is troubling.”
Jefferson County filed the largest municipal bankruptcy in U.S. history in November. Harrisburg also filed for protection from creditors under Chapter 9 but a judge rejected the petition. Stockton is working to restructure debt under a California law designed to help municipalities avoid bankruptcy through mediation with creditors.
The judge has ruled that Jefferson County is eligible to proceed with its Chapter 9 case because it is insolvent and wants to adjust its debt, has negotiated with creditors in good faith, and is qualified under Alabama law to file the petition. Creditors are seeking to appeal the determination that the county is authorized by state law to file for bankruptcy.
In Chapter 9, until the county reaches the point of requesting approval of its plan of debt adjustment, it has complete control and can pick and choose which obligations to pay and not to pay.
Matt Fabian, managing director at Municipal Market Advisors, said Jefferson County’s decision not to pay on the GOs was widely expected.
“At some point, the county’s strategy turned from restructuring its sewer bonds to simply shirking its debt obligations to avoid raising taxes,” Fabian said. “And by allowing it to continue, the state is sanctioning this approach.”
The county is dependent on the state Legislature for authorization to raise taxes, but lawmakers have refused to give it financial relief for several years.
More than $200.52 million of GOs are outstanding in Series 2001B variable-rate warrants, and 2003A and 2004A fixed-rate warrants. The 2003 and 2004 GO warrants are insured by National Public Finance Guarantee, which said Wednesday that investors will not miss payments.
Meanwhile, Financial Guaranty Insurance Co. filed a motion Wednesday asking Jefferson County’s bankruptcy judge to raise sewer rates and increase revenues pledged to $3.14 billion of defaulted sewer warrants.
FGIC insures $1.6 billion of outstanding sewer warrants, and insures another $19.8 million though debt-service reserve fund policies.
The bond insurer said it currently is owed $101.4 million for sewer warrants acquired after the county defaulted on payments and $3.3 million under its reserve fund policies.
FGIC said nothing has been done to address the issue since the bankruptcy judge removed a state court-appointed receiver and returned control of the system to the county on Jan. 6.
“In the face of inaction by the commission, cause exists to lift the stay to allow the receiver to implement new rates pursuant to the requirements of the indenture and Alabama law,” the insurer’s filing said. “Alternatively, the county should not be allowed an indefinite period of time to implement a rate increase to the continuing detriment of all parties in interest in this case.”
