Alabama’s Jefferson County Hires Bankruptcy Lawyer Klee

Jefferson County, Alabama, which may vote in two days to file a record U.S. municipal bankruptcy, hired attorneys who represented Orange County, California, when it sought protection from creditors in 1994.

County commissioners voted 5-0 today to retain Kenneth Klee and his Los Angeles firm Klee, Tuchin, Bogdanoff & Stern LLP. The commissioners have scheduled a July 28 meeting in which they may decide to seek bankruptcy protection, extend negotiations with creditors on restructuring more than $3 billion of sewer bonds or approve a settlement.

Creditors including JPMorgan Chase & Co. and bond insurer Syncora Guarantee Inc. haven’t responded to a county proposal to reduce its debt obligation to about $2 billion, while raising sewer rates by 8 percent for the next three years, commissioners said. The county will likely enter bankruptcy if creditors don’t respond this week, they said.

“My constituents are saying pull the trigger,” Commissioner Sandra Little Brown said at a meeting.

The county, home to Birmingham and more than 658,000 residents, has been under fiscal stress for more than three years after a sewer-bond refinancing collapsed during the credit crisis. Its woes intensified when the Legislature refused to act after a court struck down a local occupational tax in March. The tax generated about a quarter of Jefferson’s general-fund revenue, and losing it forced officials to put more than 500 employees on unpaid leave.

Standstill Period

The July 28 meeting will come a day before the end of a 30-day standstill period in which the county and creditors agreed to pursue a settlement. A court-appointed receiver who is managing the sewer system has also agreed not to try to seize a portion of a $75 million settlement from JPMorgan for securities violations related to county sewer bond and derivative sales.

A move by the receiver, John Young, to claim part of that money may also trigger a flight to court protection, said commissioner Jimmie Stephens. Chapter 9 of the bankruptcy code would guard the county from collection actions.

Justin Perras, a JPMorgan spokesman, declined to comment on the situation today. Michael Corbally, a Syncora spokesman, and Young didn’t immediately respond to telephone calls seeking comment.

Refinancing Proposal

Previously, debt holders and companies that insure the bonds proposed refinancing as much as $2.4 billion and raising sewer fees more than 25 percent for at least three years.

Commissioners have said they will reject any proposal that requires them to raise sewer revenue by 10 percent or more.

The county will pay Klee a $50,000 retainer and $500,000 if it moves forward with bankruptcy. Commission President David Carrington said bankruptcy would cost the county $1 million a month. He declined to discuss legal strategy.

Chapter 9 wouldn’t erase the debt. Instead it would provide a judicial forum for adjustments, which may take years.

The San Francisco Bay city of Vallejo, California, entered bankruptcy in May 2008, as the recession eroded tax revenue and unions rejected wage cuts. After spending more than $10 million, Vallejo remains under court protection.

Jefferson Commissioner Joe Knight said the cost may be worth it to settle the county’s debt crisis.

“We can afford $1 million to close this convoluted saga,” Knight said.

The commissioners’ options narrowed when the state Senate failed to act on a bill to give the county more authority to raise local taxes. Jefferson needed revenue to replace the wage and business-license tax that generated about $73 million a year, or a quarter of the county’s general fund budget, before the court struck it down in March.

Forced Cuts

The revenue loss forced job cuts, closed satellite courthouses and pared spending on public safety and road work.

Jefferson’s fiscal difficulties are tied to a sewer-debt refinancing that unraveled in 2008, when investors dumped the county’s floating-rate bonds after companies that insured them lost their top credit ratings. Banks providing backstop guarantees that allowed investors to sell their bonds demanded accelerated payments on $800 million of debt that the county couldn’t make.

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