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Jefferson County, Alabama has an 80% chance of filing for the largest municipal bankruptcy in U.S. history, a county commissioner said yesterday as county officials met with Chapter 9 experts to discuss their options.Reuters reports that creditors have not yet responded to the county’s plan to settle its $3.2 billion sewer debt, submitted last week. The plan would require creditors to erase $1.3 billion of the debt, which is the result of soured bond financing.
County commissioners met in Birmingham with Los Angeles-based bankruptcy lawyer Kenneth Klee, one of the nation’s leading experts on Chapter 9 bankruptcy who was involved in the 1994 Orange County, Calif., bankruptcy, the largest muni filing to date.
The main financial hurdle for Jefferson County is not the sewer bonds, but the general fund deficit caused by the loss of its occupational tax earlier this year, Klee told the Birmingham News. The county has run out of general funds and had to borrow $10 million from reserves this month to maintain operations.
Ultimately, the solution to Jefferson County’s finances depends on Alabama state lawmakers enacting legislation to would give the county an additional revenue source. Chapter 9 won’t make this problem go away, Klee said, but may spotlight the problem enough to force the state legislature to act.
The county won’t have to make a decision until July 29, when its 30-day negotiating period with creditors ends. Incidentally, the Securities and Exchange Commission will be in Birmingham that day for a hearing on the state of the municipal bond market. The SEC announced today that the hearing, part of an extended market review, will focus on distressed communities, small bond issues, disclosure, derivatives, and price transparency.
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