BRADENTON, Fla. — Jefferson County, Ala., faces a $77 million deficit by the end of the fiscal year due primarily to the loss of tax revenues while “contingent” expenses could render the county insolvent, according to the national turn-around firm FTI Consulting.
FTI’s released a 23-page report this week suggesting ways the county could achieve budgetary savings, though not enough to cover the anticipated deficit and capital deficiencies at the county-owned hospital. It also touched on what the county faced if bankruptcy is considered.
“Contingent claims threaten the general fund’s solvency,” including a $98 million loss from the occupational and business taxes that a court struck down recently due to a procedural error by the Alabama Legislature and $105 million in accelerated payments due because the county is in default on its 2001-B variable-rate general obligation warrants.
Another contingent claim is the “potential reclamation” of $75 million Jefferson was awarded from a settlement between JPMorgan and the Securities and Exchange Commission, FTI said.
The money was awarded to Jefferson County as part of an SEC settlement of securities fraud and other charges against JPMorgan involving nearly $3.2 billion of troubled variable- and auction-rate sewer warrants sold by the county and related interest-rate swaps. The county has defaulted on the warrants.
JPMorgan did not admit or deny the SEC’s charges, but the county filed suit against JPMorgan and other defendants shortly after the SEC settlement and other lawsuits involving the sewer warrants are pending, including two by the major insurers of the sewer warrants.
It is not clear if the “potential reclamation” of the SEC award could be related to an existing suit or a future challenge.
SEC spokesman John Nester said he is not aware of any SEC-awarded financial settlement that has been overturned.
An FTI spokesperson said, “The report speaks for itself and there’s nothing more we can add at the moment.”
“We had an independent outside firm look at our financials and basically confirmed what our findings had been,” said David Hooks, chief of staff to Commissioner Jimmie Stephens, who heads up the County Commission’s finance committee.
FTI’s report includes three scenarios in which Jefferson County could achieve some budgetary savings between $30 million and $75 million, which would require a range of mild to severe actions including layoffs of hundreds of workers, reducing the sheriff’s budget, and cutting services. None would overcome the entire cash-flow deficit, the report said.
The county could also explore consolidating some satellite operations, making changes in pension benefits, reducing employee pay, and pursuing budgetary relief in terms of additional sources of revenue. The County Commission has asked the local legislative delegation to consider several measures for budget relief.
Hooks said that after coming into office in November, county commissioners had already cut $31.5 million from the budget and the loss of the occupational and business license tax leaves a gap that cannot be closed without assistance from lawmakers.
“This commission is absolutely committed to addressing the issues and getting this county turned around but we can’t do that without replacement revenues,” said Hooks, who is also a Homewood City Council member and former municipal financial adviser. “Under the home-rule restrictions of the Alabama constitution, only the Legislature has the authority to give us the power to raise revenues.”
The FTI report said filing for Chapter 9 bankruptcy “would allow for the elimination, modification, or deferral of certain expenses” to address the significant funding gap, “but the positive longer-term benefits and related costs (which could be very substantial) of Chapter 9 will need to be assessed by the county and counsel.”
“A Chapter 9 plan that could be deemed feasible and fair by the bankruptcy court would likely have to include spending cuts and service curtailments,” FTI said. “Although Chapter 9 may provide some relief from the current budget gap, it may be limited.”
The county hired FTI Consulting in March to do a preliminary assessment of the Jefferson’s finances and governmental structure. The firm agreed to do the work for approximately $35,000, which largely covers expenses.
FTI consultants presented their report Monday to the county’s legislative delegation and to the County Commission on Tuesday, fulfilling their current obligation unless the county hires the firm to do additional work.