Jefferson County Bankruptcy Filing May Not Block Future Access to Credit
Jefferson County, Alabama, officials shouldn’t worry that a bankruptcy filing will damage their ability to borrow money in the future, said lawyers who guided other municipalities through two of the biggest court-supervised restructurings. The markets will forget, they said.
Fear that a municipality would be shut out of the bond market after leaving court protection “is just a bunch of hoopla,” said lawyer Marc Levinson, who won court approval July 28 for a plan to end the bankruptcy of Vallejo, California, about 25 miles northeast of San Francisco. The city saved tens of millions of dollars by cutting retiree benefits and slashing by two-thirds the interest rate paid to its lender.
“Markets have no memory; they are forward-looking, not backward-looking,” said Bruce Bennett, lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in U.S. history in 1994. “If a municipality effectively restructures and emerges from Chapter 9 with a strong balance sheet, it should have the same access to the credit markets as any entity having similar credit characteristics.”
Jefferson County commissioners postponed until today a decision on whether to file a Chapter 9 petition in U.S. Bankruptcy Court as Alabama Governor Robert Bentley and local officials negotiate with creditors including bondholders and JPMorgan Chase & Co. (JPM) The commission is scheduled to meet today in Birmingham at 2 p.m.
Another meeting is scheduled for Aug. 9 and interviews with three commissioners yesterday left open the possibility that a vote may again be delayed.
On Aug. 2, commission President David Carrington said there are probably “30 sticking points” in talks with creditors over restructuring $3.1 billion of sewer-system debt. The county has asked bondholders to forgive $1.3 billion of the debt, while creditors have offered to write off $1 billion.
Since 2008, municipalities have responded to falling tax revenue and burgeoning debt by laying off a record number of workers and slashing services, rather than using Chapter 9 of the U.S. Bankruptcy Code, said Jeff Esser, executive director of the Government Finance Officers Association in Chicago.
Bankruptcy wasn’t considered in most cases because of concern that a filing “would have a significant and permanent effect on a municipality’s ability to go out and borrow money,” Esser said in an interview.
Jefferson County officials said they share that fear.
“Access to the credit markets in the future is absolutely one of the major concerns that one must address in contemplating bankruptcy,” Jefferson County Commissioner Jimmie Stephens said in an e-mail. Commissioner Sandra Little Brown said through an aide, Walter Mitchell, that she agreed with Stephens.
Such concerns aren’t justified, said Bennett, of Dewey & LeBoeuf LLP in Los Angeles. He currently represents the Los Angeles Dodgers Major League Baseball team, which sought Chapter 11 protection in June. Bennett and Levinson aren’t involved in the Jefferson County negotiations.
Companies that successfully reorganize in Chapter 11 bankruptcy maintain access to credit markets at essentially the same interest rates as before filing, Bennett said. The same should be true for municipalities, and any difference in credit terms would be “nominal,” he said.
Since it left bankruptcy, Orange County has issued more than $2 billion in debt, county spokesman Howard Sutter said in an e-mail.
“Cities are more wary of the credit markets than they need to be,” said attorney R. Dale Ginter, who represented retired Vallejo workers in the city’s bankruptcy case. “Yesterday’s loss was yesterday’s loss and today’s profit is today’s profit.”
Chapter 9 gives municipalities more power over their creditors, including bondholders, than companies enjoy under Chapter 11. Creditors can’t force a city to sell its assets or file a competing reorganization plan. In addition, because the 10th Amendment of the U.S. Constitution limits federal authority over states, U.S. bankruptcy judges wield little power over a bankrupt municipality.
Those advantages haven’t been enough to persuade civic leaders to opt for Chapter 9. Since November 1981, fewer than 40 local governments have sought to restructure in bankruptcy, according to court records.
Most of the more than 200 Chapter 9 cases filed since then involved special tax districts, or entities such as hospitals that were funded with state-issued bonds. In the same period, companies filed more than 20,000 Chapter 11 cases.
James E. Spiotto, a bankruptcy attorney with Chapman & Cutler LLP in Chicago, wasn’t as sanguine about the risks of a bankruptcy filing given concerns that the U.S. economy is slowing.
Municipalities that enter bankruptcy may be shut out of the bond market or face more onerous borrowing terms than public agencies that haven’t gone through a court-supervised restructuring, he said.
“You’ve got to be careful about diving into a swimming pool with no water,” Spiotto said in a phone interview. “The current market is not the time to test the principle.”
Bankruptcy “is something that has never crossed my mind,” said Gary Leubbers, who has worked for more than 20 years as a top executive for various cities, including Redlands, California. During that time, he has laid off dozens of employees, including police officers and firefighters, because of budget cuts.
Public-service professionals and the elected officials who hire them assume their municipalities would be shut out of the bond market for years should they file for bankruptcy, Leubbers said. Elected officials also fear a backlash from voters, he said. One Vallejo council member who voted for bankruptcy lost a re-election bid in the middle of the case.
“I see so many drastic actions taken and bankruptcy is never one of them,” said Leubbers, now the city manager of Sunnyvale, California, a town of 140,000 people in the heart of Silicon Valley that cut its budget without resorting to layoffs or furloughs.
Jefferson County, with its seat in Birmingham, defaulted on sewer bonds in 2008 after the financial crisis pushed up the cost of the floating-rate debt and triggered an early repayment clause it couldn’t afford. The county, Alabama’s largest, has put employees on leave, closed courthouses and canceled road repairs after a court struck down a wage-and-business tax it relied on for revenue.
Former Commissioner Larry Langford was convicted of accepting bribes in connection with the sewer financing, and two associates pleaded guilty in the scheme.
Two former bankers at New York-based JPMorgan are fighting a U.S. Securities and Exchange Commission lawsuit that they made $8 million in undisclosed payments to friends of commissioners to secure a role in the deals. JPMorgan, the second-biggest U.S. bank by assets, separately agreed to a $722 million settlement with the SEC.
Jefferson County is insisting on a “holistic solution,” commission President Carrington said this week, which would restructure the debt and solve a cash crunch in its general fund after the Alabama Supreme Court in March struck down the wage tax that generated about $75 million annually.
State lawmakers in June refused to give the county more taxing power after the court ruling, forcing 500 employees to be put on leave.
Yesterday, a $250,000 block of Jefferson County sewer auction-rate securities traded between dealers for 41.35 cents on the dollar, according to data compiled by Bloomberg.
The settlement being discussed as of Aug. 2 would resolve lawsuits brought by the county, bondholders and debt insures against one another, said John Young, the court-appointed receiver who took over management of the sewer system.
The accord also envisions a significant state role, he said. Lawmakers would need to create an independent sewer authority and pledge the state’s “moral obligation” to back the debt, he said. Governor Bentley, a Republican, would have to call a special session of the Legislature and lobby lawmakers to pass a settlement package.
“A properly structured bankruptcy that successfully brings the county out of bankruptcy quickly can minimize any stigma associated with a Chapter 9 filing,” David Perry, Alabama’s finance director, said in an e-mail. Should the case last for years because of legal battles, the effects “would be devastating,” he said.
Commissioner Brown said earlier this week that the county was preparing a counteroffer to the creditors. Commissioners hadn’t made the offer as of last night, according to local officials.
“We don’t know what we’re going to do,” Commissioner Joe Knight said late yesterday in a telephone interview. “We’re going to go into executive session and we’re going to get updated by our lawyers and go from there.”
Yesterday, the Birmingham News reported the commissioners proposed raising the amount of sewer-rate increases the municipality is willing to impose, citing people familiar with the talks who it didn’t name.
County officials previously offered to raise rates 7.8 percent annually for three years and 3 percent a year for the next two to help make payments on the debt. Creditors wanted 8 percent for five consecutive years.
The county plans to offer 8 percent annually for three years and “near” 3 percent a year after that and to demand additional concessions from creditors, the newspaper reported.
“The question is, has the damage been done already,” Carrington said this week. “If we accept these concessions and settle, it has been strongly suggested by certain creditors that we will have a stain anyway.”
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