Wednesday, March 30, 2011

Money --Down the Infrastructure Drain

If it ain't broke, don't fix it. Major infrastucture spending can lead to bankruptcy.

Bankruptcy Threatens County

Officials of Alabama's Jefferson County are expected to meet with state lawmakers Wednesday to discuss how to avoid filing the largest municipal bankruptcy in U.S. history after a court disallowed a local tax.

The county, which has said its expenses will exceed its income by sometime in July, has been staving off bankruptcy for about three years, after absorbing $3.2 billion of debt resulting from a series of corrupt and disastrous decisions in financing a sewer-improvement project.

But its fate grew considerably bleaker earlier this month when the state supreme court affirmed a lower court ruling that a local occupational tax is unconstitutional. Losing the tax will leave the county with a revenue shortfall that is about a third of its operating budget.

The lost tax revenue represents roughly 44% of the revenues the county actually has control over for general operations due to the "earmarking" of most revenues for various purposes, said county finance Commissioner Jimmie Stephens.

Jefferson County, with a population of about 665,000, is home to the state's largest city, Birmingham. About 13.8% of its population lived below the poverty line in 2008, according to U.S. Census figures.

The pressure is on to address the county's situation as state legislators only meet until the end of May. Wednesday's meeting is the first formal one between all members of the five-person county commission as well as the entire Jefferson County legislative delegation, though less formal talks have been happening. The bones of a solution could emerge this week, Mr. Stephens said.

Like other municipalities amid the recession, Jefferson County has struggled to provide necessary services amid a decline in tax receipts. But the county has also been grappling with an unusual set of problems related to its debt.

The debt is the product of several financing decisions in the 2000s, such as borrowing at variable interest rates and using bond insurers that were later weakened in the credit crisis. Compounding problems was Jefferson County's use of derivatives called interest-rate swaps, with which it bet the wrong way on the direction of interest rates.

Several former Jefferson County officials have been convicted on corruption charges related to sewer-bond dealings.

If Jefferson County were to pursue a bankruptcy, its filing would be the largest ever by a municipality. Orange County, Calif., set the record in 1994 with around $2 billion of debt from various obligations.

Government officials generally try to avoid bankruptcy because a filing can result in higher future borrowing costs for not only the municipality that files, but also nearby local governments and the state itself.

A spokeswoman for Alabama Governor Robert Bentley, a Republican, said in an interview the governor would support a bankruptcy for Jefferson County, if that is what its officials decide is the best option.

Alabama doesn't have a formal oversight program for distressed municipalities, as some other states like Michigan and Pennsylvania do.

Jefferson County needs state aid to avoid bankruptcy because it doesn't have home-rule authority, or the ability to raise taxes or fees without approval from the state.

It also lacks fiscal flexibility: Jefferson County only has budgetary control over about 18% of its $942 million in total tax revenues, according to David Hooks, the county finance commissioner's chief of staff. The rest is "earmarked" for specific purposes.

Mr. Stephens, the commissioner, said state legislators could help by "unearmarking" revenue in the county's budget and giving it more control over its ability to raise new sources of revenue. He stressed that additional budget cuts could still have to be made.

Some observers in the muni-bond market doubt a bankruptcy can be avoided. The "loss of a major revenue source makes it much more likely," said Matt Fabian, managing director of Municipal Market Advisors, an independent research and strategy firm based in Concord, Mass.

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