BRADENTON, Fla. — Jefferson County's emergence from Chapter 9 bankruptcy has sparked interest in general obligation bondholder protections in Alabama, according to Moody's Investors Service.
Jefferson County received approval of its debt adjustment plan in a formal written opinion Nov. 21. The county substantially implemented the plan Dec. 3 by closing on $1.8 billion of new sewer warrants and using proceeds to pay creditors holding $3.14 billion in old sewer debt.
Nearly all of the county's other debt, including GO warrants, was left largely intact. The case, however, raised questions about the structure of GO bonds because they were not protected during the county's case.
"GO debt issued by local governments is in the form of limited tax bonds or warrants," explained Moody's analyst Sarah Jensen. "While these instruments carry an irrevocable full faith and credit pledge that applies to all of a local government's available financial resources, they do not include an explicit promise to raise property taxes or other revenues."
Alabama's constitution also contains strict limits on local property tax rates and closely regulates other local revenue sources, she said.
Alabama local GO bonds and warrants are similar in that they typically carry full faith and credit pledges, and neither offers a statutory lien. The main difference between the two obligations is that GO bonds require a voter referendum and warrants do not.
The constitution limits the rate and dollar amount of an ad valorem tax levy for each class of property. Under Amendment 373 of the constitution, a local government can increase the maximum rate if the proposal is vetted through public hearings, approved by a public referendum, and permitted by the legislature.
"These requirements create significant barriers to increasing property tax rates," Jensen said.
Other revenues that are legally available to pay GO debt can include sales and use taxes, occupational and business license taxes, permit fees, court fines and fees, lease taxes and revenues from government-owned enterprises. None of these revenues are specifically pledged as security for bonds or warrants.
While some local governments have latitude to raise rates for non-property taxes, such taxes must be levied in accordance with state law.
Jensen said a prime example of noncompliance risk is the Alabama Supreme Court's invalidation of Jefferson County's occupational and business license taxes in March 2011.
"The loss of these major revenue sources, approximately 30% of total county general fund revenues, was a primary driver for Jefferson County's bankruptcy filing in [November] 2011," she said. "Despite limitations on revenue-raising, local governments have significant authority to cut expenditures to help mitigate budget pressures."
Alabama is a right-to-work state, and local governments have a long history of cutting services and workforces to balance budgets, said Jensen.
Local governments in Alabama also are allowed to file for Chapter 9 bankruptcy without any intervention or approvals required by the state.
According to Moody's, Alabama has an "unusually high rate of municipal bankruptcies" though most have occurred in small cities and towns. Over the past 25 years through 2013, seven of the 44 municipal bankruptcies have been in the state.
Jefferson County's was the largest municipal bankruptcy in the nation with more than $4 billion of debt until Detroit filed last July.
