Bloomberg News

Alabama Lawmakers Have 15 Days to Find County Bankruptcy Fix

April 03, 2012

Alabama (BEESAL) lawmakers, with 15 working days left in their legislative session, are considering at least two ways to fix a revenue shortfall that prompted bankrupt Jefferson County (3681MF:US) to miss a $15 million bond payment.

The measures seeking to solve the county’s financial woes - - including a wage tax -- aren’t assured passage, as lawmakers race to finish their business in a session that began about two months ago.

The urgency to find a solution increased yesterday after the missed payment and a downgrade of the county’s general- obligation debt to the third-lowest junk level by Moody’s Investors Service. The county already has fired workers, closed courthouses and has been unable to promptly pick up road kill.

Jefferson County (3681MF:US) filed the biggest municipal bankruptcy in November after state and local officials, a court-appointed receiver and bondholders failed to implement a deal to reduce $3 billion in debt tied to the failed financing of a sewer renovation by about $1 billion. The county also has about $200 million of general-obligation bond debt and $814 million of school-construction bonds.

The financial crisis in the county, the state’s most populous, was caused by years of corruption and bond deals gone bad. It was aggravated last year by the loss of an earlier wage tax, which had generated about $70 million in annual revenue.

State Permission Needed

The county, which needs state permission to raise new money, announced last week that it wouldn’t make a $15 million general-obligation bond payment due today. Officials said they would dip into reserves to pay holders of building authority bonds.

One of the proposed legislative solutions, which has yet to be introduced, would allow Jefferson County to restore a wage tax struck down in court last year -- although only for 27 months, said Democratic Representative Patricia Todd of Birmingham. She said she has seen the proposal as it was being negotiated between the county’s Democratic and Republican lawmakers.

“It would sunset right at the time we’re running for re- election,” Todd said in a phone interview.

The other measure was announced in a news conference yesterday and is scheduled to be introduced today in the legislature in Montgomery. It would reinstate the wage tax for several years and then replace it with a sales tax now dedicated to schools. The legislation also would divert $12 million of the estimated $60 million in wage-tax revenue to support medical research at the University of Alabama at Birmingham.

‘Band-Aids’

Representative Jack Williams, a Republican lawmaker from the Jefferson County town of Vestavia Hills who crafted the measure, said he wants a long-term solution.

“What they are talking about will get us through the next election and then fall apart,” he said in a phone interview. “I’m not voting for Band-Aids or calamine lotion.”

Jefferson County Manager Tony Petelos said the county needs a long-term fix to emerge from bankruptcy more quickly.

The county’s general-obligation debt is unsecured. In its bankruptcy petition, the county listed the top three unsecured creditors as Munich’s Bayerische Landesbank (BLGZ), the Depository Trust Co. and a unit of JPMorgan Chase & Co. (JPM:US)

Politics have stymied attempts to help the county.

In the weeks before bankruptcy, Republican Governor Robert Bentley tried and failed to get local lawmakers to agree on a solution, saying a bankruptcy would hurt the entire state.

Killing Legislation

In Alabama, one member of a county delegation can kill a local bill. The 18-member Jefferson delegation remained divided along party lines, with Democrats favoring a new tax and Republicans pushing to use sales-tax money earmarked to help the poor.

In an e-mail last week, a Bentley spokesman said he was watching the Legislature’s actions.

“We are monitoring the Jefferson County financial situation very carefully,” said the spokesman, Jeremy King. “Jefferson County needs to pay its debt, and the legislative delegation needs to come to a consensus on a solution so that the county does not run out of money. Governor Bentley looks forward to working with the delegation to help craft a solution in the current legislative session.”

Bentley now believes Jefferson’s bankruptcy hasn’t affected the rest of the state because investors realize that Jefferson County’s situation is unique, he said.

The Legislature can decide when to use its 15 remaining working days between now and May 21. That gives little time to either of the two proposals.

Alabama law requires bills to be advertised for four weeks. Williams’s proposal has been. The other proposal hasn’t been.

The 27-week proposal has the reluctant support of most of the Jefferson delegation, Todd said.

The Williams proposal, she said, doesn’t.

“It will die in committee,” Todd said.

The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

To contact the reporter on this story: Margaret Newkirk in Atlanta at mnewkirk@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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