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Alabama Ruling Imperils Jefferson County

MAR 16, 2011 5:54pm ET
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BRADENTON, Fla. — The Alabama Supreme Court Wednesday struck down an occupational tax that provided one-third of Jefferson County’s general fund revenues, potentially setting the stage for the county to file for the largest municipal bankruptcy in history.

The high court sided unanimously with a lower court judge who on Dec. 1 said the state Legislature enacted the tax improperly during a special session in 2009.

The current occupational tax was enacted as a replacement for a previous version of the tax that also was struck down by the state Supreme Court due to legislative procedural issues.

The county’s five commissioners, who were just elected in November, are now faced with asking the Legislature for relief in the form of an alternative source of revenue, according to ­Commissioner Jimmie Stephens, who heads up the county’s finance committee.

“We are completely shocked and dismayed at the ruling,” Stephens said.

The Supreme Court ruled that the final version of the bill enacting Jefferson County’s occupational tax in 2009 was significantly different from the version advertised in advance of consideration by the Legislature, which violates Alabama law.

Stephens said the ruling could call into question many bills approved by the Legislature, since bills often change significantly before they are approved.

“This has really taken us aback and actually puts us back in the legislative process,” he said. “We will meet with [the local delegation] next week to try to resolve this crisis.

“If the Legislature will help us we can avert this crisis. If they won’t, it’s going to be Armageddon about the last week in July,” Stephens said.

The County Commission had begun preparing for the potential loss of $70 million in revenues from the general fund soon after the lower court judge called the funding source into question.

The board also established contact with creditors holding nearly $4.5 billion of troubled variable- and auction-rate debt, Stephens said.

The board froze hiring, agreed to sell the county nursing home, cut general fund expenses by $23 million, and dropped $10 million from the capital budget.

“In spite of all that we are still facing about a $32 million shortfall,” Stephens said. “Our current expenses will exceed revenues the last week of July.”

The commission recently hired the turn-around firm FTI Consulting Inc., which worked on Orange County, Calif.’s bankruptcy in the 1990s.

FTI is doing a top-down analysis of the county government, which will lead to “right-sizing” its structure, modernizing antiquated procedures, and improving operational efficiencies, according to Stephens.

The firm also is developing plans for filing for Chapter 9 bankruptcy as a last resort.

If the Legislature refuses to provide relief since the court threw out the occupational tax revenue, that could “pull the trigger” on filing for bankruptcy because the county does not have home rule and cannot raise most taxes or fees without the approval of lawmakers, Stephens said.

“We would seek reorganization and FTI would craft that plan for us,” he said. “I can promise you right now the threat to our government is real and these plans are actually taking place.”

The new commissioners that were elected in November seem to be tackling fiscal problems differently from their predecessors, with a potential remake of the government’s structure.

However, the new board is sounding a familiar ultimatum from Alabama’s largest county, said Andreas Rauterkus, assistant professor of finance at the University of Alabama at Birmingham’s School of Business.

“All we hear is that if we can’t get the tax back, we need to file for bankruptcy. If we can’t negotiate with the sewer debt creditors we have to go bankrupt … as if paying off one’s debt is a bad thing,” Rauterkus said.

“I think that what has been going on here in the last three years and what has emerged in the last few months after the election is going to hurt the county in the long run and the state.”

While it is true that other municipalities have filed for bankruptcy and emerged successfully to re-enter the bond market, Rauterkus said Jefferson County’s protracted fiscal problems and ongoing talk of bankruptcy creates a perception in the market that the county is unwilling to pay back its debts.

“If you threaten bankruptcy in the corporate world at every junction, your suppliers will not sell to you on credit anymore and all transactions have to be in cash,” he said.

A complication that could delay serious discussion about dealing with the county’s troubled debt is the fact that several years of audits have yet to be completed, Rauterkus said.

Commissioners have hired a firm to complete the audits, which may not be done until later this year.

In addition to the occupational tax issue and late audits, the new commission has concurrently worked to keep negotiations open with creditors who hold $3.2 billion of troubled sewer revenue warrants.

Stephens and Commission President David Carrington went to New York City early in the year to meet with creditors and insurers of the county’s bonds.

“I think they understand this commission has the resolve to solve the problems, and we look to seek common ground to find an equitable solution but at the same time not seek a solution that will harm the citizens of the county,” Stephens said.

“What we determine to be equitable is something that will closely approximate the revenue stream from the sewer debt that will allow for capital expenditures for the maintenance of the sewer and will limit future rate increases to a reasonable level.”

Stephens said the same creditors of the sewer debt also hold the county’s other troubled debt, which amounts to more than $100 million each of variable-rate general obligation warrants and sales tax revenue bonds that were sold for school capital projects.

There also has been discussion between the board and some lawmakers about creating a Governmental Utility Services Corp. to acquire and manage the sewer system, and its $3.2 billion of outstanding debt, according to Stephens.

It is not clear how dealing with the sewer debt would integrate with the GOs and sales tax bonds, but Carrington has publicly said that he wants a “holistic” solution to all the debt.

On Monday, Carrington and Commissioner Sandra Little Brown discussed plans for the sewer system with Gov. Robert Bentley, a Republican who also was elected in November and said he supported bankruptcy for Jefferson County on the campaign trail.

Carrington and Brown could not be reached for comment about the specific plans that were discussed with the governor.

Bentley committed to the commissioners that he would call a special session of the Legislature to deal with the debt problems, said the governor’s spokeswoman, Rebekah Mason.

“Obviously, this new commission is showing an effort to finding a solution to the problem,” Mason said. “The governor assured them that he would support their plan and, yes, if bankruptcy was the solution he would support that.”

The underlying concern is that the ongoing situation is hindering economic development efforts in Jefferson County and around the state — a concern that has been cited frequently in the past under the previous County Commission.

The fact that Bentley supports bankruptcy is not news since he talked about it during the campaign, Mason said.

“Jefferson County plays a vital role in Alabama’s economy,” she said.

“We don’t want this to be an anchor that weighs down Alabama’s efforts to stimulate economic development. You want to put your best face forward in recruiting industry.”

Stephens, who was born and raised in Jefferson County, said the new commission is united in its efforts to end fiscal problems by bringing county government “into the 21st century” and solving the debt problems outside of bankruptcy, if possible.

“We are going to get our house in order,” he said. “When we look at our constituents we want to say we did this the right way.”

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