My county, Jefferson County,(Birmingham, Alabama) is in the midst of financial crisis due to sewer debt. The total amount of debt is estimated to be somewhere in the 4 to 5 billion range. We are on the verge of having to file the Nation's largest Chapter 9 municipal bankruptcy if a new plan to restructure the debt is not approved in a State Legislature special session and approved by a statewide referendum.
There have been less than 500 municipal bankruptcies filed in the this country. The largest thus far was Orange County, California in 1996. I think a lot of our citizens are under the impression that Orange County has recovered. If there are any Orange County residents out there that have an alternative view please share.
Personally, I think it would be disastrous to file bankruptcy and just want to walk through that and see what some of the readers think. Timetable of the debt and swaps
Background
This story starts in the 1990's when the Federal Government found Jefferson County non-compliant with the Clean Water Act. Expansion of the sewer system was undertaken as well and costs began to rise. Customers were paying exorbitant rates. Therefore numerous bond swaps and refinances were made in order to try and keep down costs.
The crisis
Throw in poor planning, convictions of public officials for bribery with the contractors, convictions of contractors, accounting deficiencies and a series of SEC investigations over the last ten years. Finally in 2007, the insurers were no longer able to cover the debt service payments. Rates on interest payments have risen from 3% to 10% This has been attributed in large part to the subprime-mortgage lending crisis in this country.
Over the past few months, the county has been entering into emergency forebearance agreements while at the same time discussing alternative plans and the possibility of Chapter 9 bankruptcy.
Options
- The County Commission passed a plan led by CitiGroup which would eliminate the debt and avoid bankruptcy. This plan would freeze sewer rates through 2012 (at which point they would raise no more than 2% annually) and extend the county educational 1 cent sales tax (which was the subject of another lawsuit). This would also raise business licence fees and expand an occupational tax. Property and sales taxes increases would cover debt if county revenues do not cover the debt.
- Bankruptcy - The State System of Alabama Retirement System (RSA) has said they would come in and buy the sewer system out of bankruptcy from an estimated 1.1 billion to 1.4 billion. RSA would operate the sewer system until the county could come and repurchase the system. This plan is laid out in today's Birmingham's News.Birmingham's News
Concerns
- Citizens are mad because of the high percentage of bond insurance and professional fees in the swaps which are estimated to be 3.2% of the total amount borrowed. Studies have shown that in most swaps those are at 1%. Certainly law suits and more SEC investigations will clear that issue up.
- Citizens are being mislead to think that filing bankruptcy would wipe out a large portion of this debt. I attended a public hearing and reported that the two Dissenting Commissioners of the Citi Group are responsible for misleading citizens in that direction.
- It may not even be possible for the RSA - David Bronner to purchase the sewer system out of bankruptcy. I explain that in this diary that any sale would go to the highest bidder
The Birmingham News ran a front page article this morning calling the Bronner plan, now with a buyback provision, a competing plan of the CitiGroup plan. That is not accurate as even Jim Carns and Bobby Humphreys have said that any sale would go to the highest bidder.
Furthermore, we are not sure that it is constitutionally permissible to sell the sewer system. So we better be sure that if rely on a plan that hinges on a purchase post-bankruptcy of the sewer system that it even feasible.
- Furthermore, those who present a picture of a thriving Orange County after emerging from bankruptcy are also not looking at the total picture. I would urge anyone to read this piece from the California Public Policy Institute. Orange County at the time of the publication was still reeling from cut services that benefited the poor (yes there are poor in Orange County), and the county still had low bond ratings (not sure that B'ham News read this article). The Public Policy Institute of California recommends,in the alternative,that
Municipal bankruptcies should be avoided by local governments and state governments, even if extraordinary efforts are required
Orange County essentially rushed to bankruptcy which had far reaching effects including worsening relations with other local governments.
The California Public Policy institute strongly recommends the local and state governments working together to find a solution.
- The County Commissioners are going to have to work together to avoid bankruptcy. I'm not so sure they understand what the side effects of bankruptcy would be. If you have lived somewhere where bankruptcy has been used please chime in and let me know if I'm on the right track. Or if you are a municipal financial guru your advice would also be appreciated.