Jefferson County debt crisis
Debt crisis
The Jefferson County debt crisis emerged in late 2007 as the interest rate for the county's enormous sewer construction debts shot upwards during a national crisis in the mortgage lending market.
Sewer construction
The Jefferson County sewer system incurred enormous debts in the late 1990s for repairs, upgrades and expansion of its sewer and water treatment infrastructure. Part of the work was required by a 1996 consent decree forged to insure that the system complied with the requirements of the federal Clean Water Act. Other expansion was undertaken at the same time to add ratepayers to the system to help pay back the debt and to promote development in the county. As costs continued to climb, rate-payers saw their sewer rates shoot upwards to service the bond debt. A 2003 audit of the sewer project found a critical lack of planning, unqualified project management, serious accounting deficiencies, and arrangements with contractors that opened the county to unusual risk. Later it was found that numerous county officials had accepted bribes from contractors.
Bond swaps
Efforts to hold down increases in sewer rates led the county to negotiate numerous refinancings of its bond debts. Following the advice of outside financial consultants and its own finance director, Jefferson County entered into an extraordinary number of interest rate swaps. Inquiries into those deals found that the county was paying its advisors and bankers unusually high fees and the Securities and Exchange Commission has opened an investigation of possible violations of securities laws.
Crisis
Due to a national crisis in the mortgage lending sector which emerged in 2007, the insurers, which were supposed to have kept the bonds' variable interests rates low, were no longer able to cover the bonds. As a result, interest rates shot up from around 3% to over 10% at variable-rate auction. With no ability to cover the massive debt service payments, the county entered into emergency negotiations with its bondholders and began openly considering Chapter 9 bankruptcy. If the county did default on its debts, it would be the largest bankruptcy by a municipal government in United States history.
Commission president Bettye Fine Collins has proposed applying $27 million per year in revenues generated by a 1 percent sales tax for school construction toward servicing of the bond debt. The proposal would require approval from the Alabama legislature as well as from bondholders. In a two-day conference with county lawyers and bondholder representatives on Wall Street it was recommended that the debt be financed primarily through continued increases in sewer rates.
References
- Hansen, Jeff (March 9, 2008) "Jefferson County, Alabama sewer debt grew into crisis." Birmingham News
- Hansen, Jeff and Eric Velasco (March 23, 2008) "Jefferson County sewer debt crisis contained key players." Birmingham News
- Wright, Barnett (March 27, 2008) "Investment bankers, creditors tell Jefferson County to raise sewer rates." Birmingham News