BRADENTON, Fla. — The fiscal distress in Jefferson County has elicited renewed calls from a financial analyst for investors to be cautious when buying debt sold by issuers from Alabama.
Meanwhile, Moody’s Investors Service on Monday said the events unfolding in the state’s most populous county — which recently placed 547 employees on administrative leave without pay due to budget constraints — is also a credit negative for other issuers within the county’s boundaries.
The recent failure of the state Legislature to provide the county fiscal relief due to a situation lawmakers had caused, along with intervention by the Alabama attorney general in the county’s sewer receivership case, “underscores a deep ambivalence toward bondholders” by state government, Matt Fabian, managing director at Municipal Market Advisors, said in his Weekly Outlook column on Monday.
“In contrast to expected behavior by other states, we believe it is far from likely that Alabama would intervene, even on a cost-neutral basis, to aid any local bond issuers in distress,” Fabian said. “Accordingly, we recommend under-weighting allocations to Alabama debt, regardless of issuer.”
Legislators ended their regular session recently without adopting measures to help Jefferson County manage a deficit created when the state Supreme Court struck down an occupational tax that provided 44% of the revenue to the county’s general fund. That prompted layoffs to begin on Friday as well as cuts in other services.
The county is in default on $3.14 billion of debt issued for its sewer system.
The Legislature chose to let the county proceed with laying off workers to avoid a near-term bankruptcy filing, Fabian said over a week ago when he first addressed the issue.
“This is absolutely an issue of willingness versus ability,” he said. “The state Legislature has chosen again and again to allow the county to fail rather than take proactive steps to resolve its crisis.”
Moody’s said failure of lawmakers to act is a credit negative for Jefferson County and its municipalities, including Birmingham, which is the county seat.
Jefferson County collects property taxes on behalf of the local governments and districts within its boundaries. The county’s severe financial difficulties “may tempt it” to hold on to some of the property tax revenues it collects “thereby passing its own cash crunch on to the local municipalities,” Moody’s said.
The property taxes are filtered through “a county government that is in default on its bonds, starved for cash, likely headed for a drawn-out dispute over the steep sewer-rate increases proposed by the sewer system’s receiver last week and quite possibly headed for bankruptcy protection,” the rating agency said.
“Individual local governments within Jefferson County will be assessed based on their ability to manage their cash if there were some kind of delay,” Geordie Thompson, vice president of Moody’s public finance group, said in a statement. “We will continue to monitor the local government credits as we have been and will update the market as necessary.”
The county would never intentionally hold back property tax revenue or any other tax revenue that was owed to municipalities, according to Commissioner Jimmie Stephens, who oversees Jefferson’s finances.
“However, part of the county’s business is collection, administration and distribution of taxes, and through the due course of business and the severe cutbacks that we are facing, there’s no way to guarantee that we can continue to provide the same operational support in the same time frame as previously done,” he said. “The cities, schools and fire districts will receive their funding as promptly as possible based upon the available workforce to provide that service.”
Fabian made similar comments in 2008 and nothing has changed with regard to the stability of other issuers in Alabama since then, according to a market expert, who asked not to be identified.
Fabian’s 2008 comments were prompted by talks on restructuring the outstanding sewer debt and calls by then-commissioners for the county to file for bankruptcy.
Fabian said in an e-mail Monday that his latest warning to investors is based on the lack of support by state government for Jefferson County and Alabama’s intervention in the county sewer system receivership case to oppose rate increases.
“The state has little regard for local bondholders or helping local credits work themselves out,” he said, adding that means investors need to require more yield to compensate for the added risk. “In the current environment, with investors more concerned about underlying credit, it’s likely this will push overall state borrowing costs wider.”
Fabian also likened the county’s unwillingness to raise rates to support the sewer system’s debt, and the attorney general’s intervention now that rate increases have been proposed, to the “politically motivated judicial opposition to rate increases” seen in the 1980s Washington Public Power Supply System debacle.
The WPPSS, which became known as Whoops, was made up of public power utilities that refused to pay their contracts to finance two new nuclear plants, a position that the courts upheld. That led to the default on $2.25 billion of bonds — the largest municipal bond default in history.
Fabian also noted that Alabama’s new Republican governor, Robert Bentley, has said he would support a bankruptcy filing by Jefferson County.
Alabama’s position shows “a remarkable difference from state support for local governments and local government bondholders in many other states, and should give bondholders pause before buying or holding any Alabama security,” Fabian said on Monday.
The governor’s office could not be reached for comment.
Bentley reportedly is considering meeting with Jefferson County commissioners and local legislators next week to discuss strategies related to the county’s plight.
