UPDATE July 29, 6:45 p.m.:
Officials in Jefferson County said today that they will decide Thursday whether to file for the largest municipal bankruptcy in U.S. history.
County commissioners rescheduled a special meeting, originally set for last night, to consider their financial options. The meeting was postponed to give state and local officials time to review a proposal from the county’s sewer creditors.
Separately, the Securities and Exchange Commission hosted a field hearing in Jefferson County today on the state of the municipal bond market. Commissioner Elisse Walter told attendees that the county’s financial crisis “starkly illustrates” why more transparency is needed in the market.
July 28, 5:12 p.m.:
Alabama’s cash-strapped Jefferson County’s has postponed the largest-ever municipal bankruptcy filing for at least one more week.
Jefferson County commissioners cancelled a special meeting, set for today, to consider a proposal from its Wall Street creditors to settle its $3.2 billion sewer debt. The meeting, which would have considered whether to file for Chapter 9 municipal bankruptcy, has not been rescheduled, but a 30-day negotiating period — set to expire tomorrow — has been extended to Aug. 4.
Jefferson County’s sewer bondholders — led by JPMorgan — had scrambled to agree on concessions before the meeting, and finally submitted a proposal late last night. Their offer would forgive about $1 billion of the county’s sewer debt, Bloomberg reports. That’s significantly less than the $1.3 billion of debt the county had asked bondholders to erase, but would still be one of the largest concessions ever in the U.S. muni bond market.
According to the WSJ, JPMorgan offered to take the biggest hit because of its involvement in Jefferson County’s soured sewer debt refinancing.
County leaders warned today that bankruptcy is still an option, adding that the creditors’ plan might not go far enough. Commissioners have hired municipal bankruptcy lawyer Kenneth Klee to represent Jefferson County in the event of a bankruptcy filing.
In case you are just tuning into the JeffCo fiscal crisis, here’s a recap of the bankruptcy saga:
- In the 1990s, a federal court forced the county to upgrade its sewer system to comply with clean water standards. The county financed the upgrade with bonds, incurring a huge debt.
- County officials, acting on the suggestion of outside financial advisors, refinanced the debt in 2003 in a complex series of interest-rate swaps and other transactions. But interest rates skyrocketed in 2008 and the county could no longer afford to make its payments.
- In 2009, the former county commissioner was convicted of accepting bribes for arranging the refinancing with JPMorgan and is now serving a 15-year sentence. 20 other former county officials and contractors have been accused or convicted of crimes related to the project. JPMorgan paid $75 million in penalties and fees and agreed to forfeit $647 in termination fees to settle SEC charges related to the Jefferson County deals, but did not admit or deny any wrongdoing.
- Jefferson County’s finances were dealt another blow this March, when the state Supreme Court ruled the county’s occupational tax unconstitutional. A bill that would have given the county $50 million a year in additional tax revenue later died in the Alabama legislature.
- The loss of revenue forced the county to lay off nearly one-third of its workforce. To make matters worse, Birmingham was slammed with a devastating tornado in April that destroyed more than 5,000 homes and buildings.
- The state finally stepped in last month, offering a “credit enhancement” to reassure Jefferson County’s creditors. State and county officials met with creditors several times, and finally submitted a proposal to settle the debt two weeks ago.
As bankruptcy lawyer Jim Johnston told us last week, municipal bankruptcy is an absolute last resort. The total value of a Jefferson County bankruptcy is expected to be more than $4.1 billion, far exceeding Orange County’s record $1.7 billion bankruptcy in 1994.
Everyone involved in the Jefferson County case stands to lose in a Chapter 9 filing. But whatever the outcome, Jefferson County’s path out of its financial nightmare will likely provide a blueprint for dozens of debt-burdened municipalities across the country.
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