Beleaguered Jefferson County Alabama Hires Bankruptcy Attorney
The beleaguered Jefferson County Alabama, which is facing a vote to file a record U.S. municipal bankruptcy, is said to have hired Kenneth Klee and his firm to represent it, according to Reuters. Klee and his firm represented Orange County California when it sought protection from creditors back in 1994.
The county commissioners decided to hire Klee and his firm, Klee, Tuchin, Bogdanoff & Stern LLP out of Los Angeles, in a unanimous vote. The county is set to pay the firm $50,000 as a retainer and $500,000 if it moves forward with the bankruptcy. According to the Commission President David Carrington, the bankruptcy would cost the county $1 million a month. They also scheduled a meeting for July 28th to decide if they would seek bankruptcy protection, extend negotiations with creditors on restructuring over $3 billion worth of sewer bonds or approve a settlement. The county had proposed that bondholders forgive nearly $1 billion worth of the $3.14 billion in sewer debt, while raising sewer rates by eight percent for the next three years but the creditors, JP Morgan Chase & Company and bond insurer Syncora Guarantee, Incorporated have not responded to the deal. If the bondholders walk away with around a third of what they are owed by the county, it would be one of the biggest "haircuts" ever in the U.S. municipal bond market, according to the Wall Street Journal.
Jefferson County has over 658,000 residents and is the home of Birmingham, Alabama. It has been in a downward spiral for over three years after a sewer bond refinancing fell through during the financial credit crisis of 2008, when investors dumped the county's floating rate bonds after companies that insured them lost their top credit ratings. The banks providing backstop guarantees that allowed investors to sell their bonds demanded accelerated payments on $800 million worth of debt that the county couldn't afford to make. To add to their problems, the Legislature refused to act after a court struck down a local occupational tax in March 2011. The tax generated $73 million a year, or about 25% of the county's general fund revenue. The loss of this income forced officials to put over 500 employees on unpaid leave, closed satellite courthouses and froze spending on roadwork and public safety.
The sewer debt involved a complex series of interest rate swaps and other terms that strained Jefferson County's bottom line. There have been several county officials convicted of wrongdoings related to the debacle and JP Morgan paid $75 million in penalties and agreed to forfeit $647 million in termination fees to settle federal securities charges related to the sewer debt. Because of its part in sewer debt, JP Morgan is said to be willing to absorb the largest part of the $1 billion forgiveness offer, according to persons familiar with the situation. By the time this news article is posted, the decision of whether or not to declare bankruptcy will likely be history.