BRADENTON, Fla. — Commissioners in Jefferson County, Ala., hired the California law firm Klee, Tuchin, Bogdanoff & Stern LLP as a consultant on strategies to resolve the county’s financial crises.
The firm, which specializes in reorganization, insolvency, and bankruptcy law, was hired in the midst of lengthy closed-door meetings last Thursday with the firm’s founders, Kenneth Klee and his partner, Lee Bogdanoff.
Klee and Bogdanoff worked on Orange County, Calif.’s bankruptcy in 1994. Orange County paid bondholders in full.
“The discussions with the commission were quite fruitful,” Klee said in an interview. He declined to provide more specifics.
Klee said he was asked by commissioners to meet with the media and give his views on the county’s crisis. Commissioners could not be reached for comment on last week’s meeting.
“Most media reports are focused on the sewer bond issue and not the general fund deficiency,” he said. “That general fund deficiency is real important and needs to be addressed as part of a sewer bond settlement.”
The county is in a budget crisis similar to the one that occurred in 2009 when about 1,000 workers were laid off when an Alabama court struck down an occupational tax providing a major source of revenue for the general fund.
Lawmakers had to be brought back into special session that year to adopt a replacement occupational tax.
Earlier this year, the state Supreme Court struck down the replacement occupational tax, ruling that it was improperly enacted by the Legislature.
Lawmakers refused to adopt a replacement tax in their regular session this year, which led to the layoffs of 550 county employees in June.
The county threatened to file for bankruptcy recently when a court-appointed receiver for its troubled sewer system sought double-digit rate hikes.
The commission and the receiver agreed not to take any action for 30 days to continue negotiations with creditors over restructuring $3.14 billion of defaulted variable- and auction-rate sewer warrants. The 30-day period ends Friday.
Klee said creditors are unlikely to settle the sewer debt problem if the county could still file for bankruptcy over the general fund deficit.
“The sewer debt is the tail wagging the dog,” he said.
Commissioners asked Klee to meet with state lawmakers, who control the purse strings when it comes to approving taxes or other revenues that Alabama counties can raise.
Denver attorney Jeffrey Cohen also met behind closed doors with commissioners on Thursday. He could not be reached for comment.
Cohen, a partner at Patton Boggs LLP, told The Bond Buyer in past interviews that a bankruptcy filing by the county over the sewer warrants would be voluntary because the debt is non-recourse.
Cohen also said a bankruptcy would be complicated by the fact that the county has $125 million of variable-rate general obligation warrants in default.
The GOs are not related to the sewer system.
Jefferson County’s budgetary funding disagreement with state lawmakers is the main problem now, according to Andreas Rauterkus, assistant professor of finance at the University of Alabama at Birmingham’s School of Business.
“The sewer crisis does not affect the general fund and that’s where the problem is,” he said, adding that the governor would have to call a special session to pass legislation allowing the county to impose a new tax.
“I am not sure if [the governor] is willing to do that,” Rauterkus said. “Although he at least seems to understand what a Jefferson County bankruptcy would do to the reputation of the whole state and that’s maybe the reason why the commission is once again threatening bankruptcy.”
On the campaign trail last year and after his election earlier this year, Gov. Robert Bentley said he supported bankruptcy if that is what the county ultimately decided as the only option.
Recently, Bentley softened his stance and said he recognized that if Jefferson County filed the largest municipal bankruptcy in history, it could reflect unfavorably across Alabama.
It’s not clear if Jefferson County would qualify to file for Chapter 9 since it has not released audits for the past two years. County officials have said they are working on bringing audits up to date over the next few months.
Municipal bankruptcy requires a local government to be insolvent or imminently in danger of becoming insolvent, and some market experts believe a current audit would be necessary to prove the county’s financial position.
In a related matter, the County Commission on Tuesday will discuss hiring the turnaround firm FTI Consulting Inc. to continue work “right-sizing” the county’s governmental structure in an effort to work with currently available revenue.
FTI was hired earlier this year to do a preliminary assessment of the county’s financial position.
In April, the firm said a $77 million deficit due to the loss of the occupational tax and “contingent” expenses could render the county insolvent.
The contingent claims included $105 million in accelerated payments on the county’s Series 2001B variable-rate GO warrants and “potential reclamation” of $75 million Jefferson County was awarded from a settlement between JPMorgan and the Securities and Exchange Commission.
In June, the sewer receiver made a claim for the $75 million, which commissioners had placed in the general fund.
