Sunday morning's coming down in Jefferson County
By Chip Drago
Mobile Bay Times
When the bombshell hurdling down on Jefferson County explodes in a couple of weeks, blasting its financial credibility to the winds for years and maybe decades to come, the aftershock will be felt all across Alabama from Mobile to Fort Payne.
Jefferson County, the state's largest, appears headed unavoidably to bankruptcy court. But its claim to prominence as Alabama's largest county is likely to pale as it takes its place in the nation's financial pages as home to the largest public bankruptcy in U.S. history.
As things stand at present, the bond markets and rating authorities don't take an especially nuanced view of a financial catastrophe. If five-year-old Bubba has an upset tummy, his nine-year-old Sissy gets a dose of castor oil, too. So it is apparently in the world of municipal/public bonds. When Alabama's Jefferson County commits an epochal blunder, all governmental bodies and agencies in the state are stained.
So what's happening in Jefferson County and what are the ramifications for all the towns and cities, water boards and industrial development authorities that will be placed on the defensive in future bond issues? MBT turned to its coterie of denizens in and on the periphery of that world.
"It is critical. They have recently been granted an extension on bond payments because of lack of funds. Technically bankrupt. (Two officials) soon indicted. Chris McNair convicted. More to come."
-- CDT
"It's bad enough to poison the well for the entire state as far as bond
insurers willing to insure issues in Alabama. Mobile recently issued
nearly $60M and learned that two of its previous insurers had been affected by the subprime mortgage industry so they used an insurer that was not affected. Now that insurer is not participating in any Alabama issue.
Mobile was also offered the swap or swaption form of financing by several firms but felt it was too big a gamble to take when interest rates were so low."
-- MQT
"Unless you've been in the middle of it (and I haven't) you can't know the details, but ... here are my thoughts:
It is bad and could get worse, both for the citizens of Jefferson County and to a lesser extent for the rest of the State. I've already heard at least two financial people who work across the country say that the whole state is tainted, since the good folks in New York don't make much distinction among jurisdictions like they might if, for instance, the City of New York were involved. Rumor has it that one of the few AAA bond insurers left has already redlined the whole state. And I would guess Jefferson County and probably Birmingham will find it difficult to borrow at all for several years, even if they work things out. If they actually declare bankruptcy 'years' could become 'decades' for the County.
The product they are getting killed by -- variable rate debt coupled with an interest rate swap -- was marketed all over the country. It has its place, but it was marketed as risk-free when responsible lawyers and investment bankers would tell you there were, and are, a number of risks involved (I have a whole page describing those risks -- it's not like they weren't known). Governmental issuers just aren't in a very good position to judge that risk, and they tend to be shortsighted even without considering political pressures, so they are susceptible. And utilities are, it seems to me, least able to handle the interest rate variations that are now killing Jefferson County.
On top of that, Jefferson County bit off some of that structure, liked it and just kept eating. They ended up essentially speculating on interest rates, with more in outstanding swaps than they had debt to match it against. Again, there are reasons sophisticated investors might do that, but they understand the risks in a way that I doubt the elected officials of Jefferson County could have.
The whole situation is very similar to Orange County, CA, and that's not a good spot to be compared to in the financial world."
-- AWC
"Bad not just for Jefferson County but for all public financing in
the state as one bond insurer has 'blacklisted' all Alabama issues until
this is resolved. Consequently this is no longer just a local Jefferson
County issue but has implications for the entire state. However this has
happened in other parts of the country (Cleveland, Ohio in the early
'90's) and the state of Ohio stepped in to prevent a bankruptcy so there
is a precedent for the Governor and Legislature to act and they probably will if Jefferson County is unable to come up with a solution."
-- JSH
"They just got downgraded by the rating agencies to D which is pretty damn bad and smells of possible bankruptcy."
-- BTT
"With 480,000 rate payers and a 329% rate increase over the last few years, the debt load is insurmountable. This is the definition of financial incompetence. Bankruptcy appears the only way out. Any future debt issuance will be encumbered, whether it is for the city or county or any other purpose. The entire predicament can be summarized in one word -- 'greed.'"
-- SDC
"I heard today (can't speak to the accuracy) that it is as bad as you've heard. Their debt has quickly grown from $3 billion or so to $5 billion or so.
Apparently that transferred a lot of debt to PAR (?) bonds which have to be resold weekly and the rates on these are going up and there are few, if any, takers for the bonds.
I've read they got a two-week reprieve but that is not likely to stave off bankruptcy."
-- AOA
"It is a real mess that has been coming for a long time. The unfortunate thing is that all Alabama entities are experiencing fall out because of their mismanagement. I hope that these deals get close scrutiny by the SEC and FBI."
-- CHE
"Seems to me it is far too big for the state to do anything.
Reminds me of the thing in Orange County, CA several years ago when the pension fund was investing in derivatives."
-- REP
"Debt is greater than total property value in Jefferson County. Headed to bankruptcy is view of Birmingham politicos."
-- SCJ
"Days away from bankruptcy. Once a golden cow, now plagued by mismanagement, greed and favoritism."
-- OPS
"This again goes back to the problems that Birmingham has with political leadership. There is a reason that the various suburbs of Birmingham are referred to as 'little kingdoms.' A large number of citizens seem to be interested in their own backyard, period. I remember having a discussion with a group of Birmingham citizens a few years ago. I asked who was on their county commission. They could not say, or even remember who their representative was. These were professionals (physicians, attorneys, accountants.) The lack of engagement by a large number of citizens and small business owners is discouraging.
There are some great leaders in Birmingham (Charles McCrary, John Johns, Carol Garrison to name a few) but they need some support. Perhaps this crisis will wake up the average citizen. (Yesterday) I spoke with someone who lives in Hoover. His business serves the Birmingham metro area. He said that he lived in Shelby County and that the Jefferson County mess just wasn't his concern."
-- SSH
