BRADENTON, Fla. — Standard & Poor’s Tuesday revised its rating outlook on Jefferson County, Ala., to negative from developing.
The action reflects recent additional financial stress and greater potential for a bankruptcy filing because the Alabama Supreme Court recently invalidated the occupational and business taxes that provide a major source of revenue for the general fund, said a report by analyst James Breeding.
“We no longer see the potential to raise the rating within the next two years,” Breeding said, adding that before the Supreme Court ruling, the rating could have moved in either direction pending a resolution related to the county’s troubled variable- and auction-rate sewer debt of nearly $3.2 billion.
“The situation now appears direr, as the immediate impact to the county’s operating fund is significant and perhaps prolonged,” Breeding said.
The county currently expects to see expenses begin to outpace revenues by July, though officials are considering options to address the loss of revenue, including a shortened work week, furloughs, layoffs, reductions in services, and office closings, he said.
“In addition to a potential bankruptcy filing to address the sewer system debt, there is also the potential for a bankruptcy filing related to the county’s general operations,” Breeding said.
In either case, a bankruptcy petition would affect all facets of county operations because revenues could be subject to a stay and payment streams could be interrupted for those issues not secured by specific “pledged” revenues, he said.
Standard & Poor’s affirmed its B rating on the county’s general-obligation warrants, which are payable from ad valorem taxes, sales and use taxes, and other revenues supporting the general fund. The county is current on its debt-service payments on the series 2001A, 2003A, and 2004A GO warrants.
The county has not made the required accelerated payments on the 2001B GO warrants. The warrants could not be remarketed or converted to bank warrants. A forbearance agreement on the accelerated payments has expired, Breeding said.
Standard & Poor’s also affirmed the B-minus on public building authority Series 2006 lease-revenue warrants, the B rating on the Birmingham-Jefferson Civic Center Authority’s special tax warrants series 2002-C and 2005-A, and the B rating on the Series 2000 warrants secured by lease payments from the Jefferson County Board of Education.
The C underlying rating and negative outlook on the county’s sewer revenue warrants was affirmed.
Standard & Poor’s lowered its rating on the county’s limited obligation school warrants Series 2004A, 2005A-1 through 2005A-4, and 2005B warrants to BBB-minus from BBB, reflecting greater overall financial condition uncertainty and narrower coverage margins.
The Series 2005A warrants were issued in the auction-rate mode and the 2005B warrants were issued as variable-rate demand warrants — all secured by a special education sales tax.
The 2005B warrants are held by Depfa Bank PLC and subject to a higher interest rate but not an accelerated payment schedule.
In addition, after Ambac Assurance Corp. was downgraded the county failed to deliver a replacement surety bond or letter of credit and a default was declared by the trustee.
“While uncertainty exists regarding the impact of a bankruptcy filing, the pledged nature of the revenue stream provides some level of comfort,” Breeding said. “Challenges are present, however, as the interest rate on the variable-rate warrants has climbed and annual sales tax revenues have declined.”
Moody’s Investors Service’s ratings for Jefferson County are B3 on the limited obligation school warrants, Caa1 on the GOs, Caa2 on the lease-revenue warrants, and Caa3 on the sewer warrants.
