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Source: Reuters

EXCLUSIVE-Alabama county devises road map for debt crisis

Published: 07 Mar 2011 17:35:01 PST

* Jefferson County weighed down by $3.2 billion debt

* County receiver to present financial scenarios on debt

* Months of secret talks with creditors likely

ATLANTA, March 7 - For years, Alabama's Jefferson County squirmed over its image as the bad boy of U.S. municipal finance. Now the county says it finally has a plan to put its fiscal house in order.

This involves convincing creditors including JP Morgan Chase that the plan has a chance of success and can be used as leverage as the county seeks to refinance its $3.2 billion debt, county officials said.

In doing so, Jefferson County hopes it can point a way forward for other deeply indebted U.S. municipalities such as Harrisburg, Pennsylvania, and Bell, California.

"The same problems that we have experienced in Jefferson County are coming to the municipal market nationwide and we are just kind of at the forefront," said Jimmie Stephens, finance commissioner in the county's five-person government.

"How we solve it and how creative we are is going to be a road map for others to follow," Stephens said in an interview.

The turnaround strategy includes a series of financial audits, management improvements and spending cuts.

When bond insurers downgraded Jefferson County's debt in 2008, causing it to mushroom, the county swiftly became a focus of risk for the multi-trillion-dollar municipal bond market.

Since then, it has teetered on the brink of what would be the largest municipal bankruptcy in U.S. history, bigger even than that endured by Orange County, California, in 1994.

To an extent, recent problems in other municipalities around the United States have shifted the spotlight from Jefferson, but it remains key for investors. Some analysts even argue that widespread municipal defaults pose a risk to the fragile U.S. economic recovery.

The stakes are high for the county too. Jefferson has a population of 670,000 but its main city Birmingham helps power the state's economy, said Alabama Governor Robert Bentley.

Bentley last month urged Jefferson to consider Chapter 9 bankruptcy if all else failed and said it could be the "greatest gift" for the county.

Most analysts argue bankruptcy would make it harder to attract investment and blight future attempts to finance bond issues.


Corruption, dysfunctional management and poor decisions got the county into trouble as it attempted to refinance an upgrade to its sewer system in the mid-2000s with auction and interest rate bond swaps.

More than a dozen county officials are in jail because of corruption. Powerful local business leader Jay Grinney, CEO of HealthSouth Corporation, described the last county commission as "incompetent" and "bickering".

Now, a fresh commission elected in November and headed by wealthy local businessman David Carrington is attempting to project unity and a focus on fiscal probity.

"They seem to have their act together. It's good to have a new set of people in charge that do not carry the baggage that the old commission was carrying," said Andreas Rauterkus, a finance professor at the University of Alabama at Birmingham.

The county's new strategy includes the following elements:

* Hiring a consulting firm, likely FTI Consulting, with a view to preparing a turnaround plan.

* County finance director Jeff Hager is conducting audits for its 2008 and 2009 finances. A 2010 audit will start later this year. Audits are an essential prerequisite to any deal with creditors since they provide transparency.

* Last year, a federal court appointed water executive John Young as the 'receiver' of the county's sewer system. Young is seeking ways to cut costs and maximize revenue from the sewer system. This will include an increase to sewer rates.

* The county is looking for ways to slash its overall spending in a bid to address its General Fund debt.

* The county is hiring a manager charged with running its general operations.

* For months, local business leaders have worked behind the scenes to keep lines of communication with creditors open.


At the core of the county's strategy are a set of financial scenarios that Young will soon present to commissioners, outlining ways in which sewer debt obligations can be met.

The key variables include interest rate levels, sewer revenue, length of time and -- crucially -- the total of outstanding sewer bond debt, which represents $3.2 billion minus whatever creditors are willing to subtract, Young said.

"I will be presenting the options to the county and creditors ... and so it is for them to decide if they intersect at a solution," he added in an interview.

In the first step towards reopening what will likely be months of secret talks, Carrington and Stephens earlier this year met in New York with JP Morgan, liquidity providers and bond insurers.

County officials said one likely obstacle is that creditors are disunited and represent divergent interests, but even so there are grounds for optimism.

"Somewhere down the line, someone's going to say: 'This was a bad deal and if this was a bad deal you wash it and you go on,'" said Stephens.

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