Alabama County Nears $3.14 Billion Settlement, Avoids Historic Muni Bankruptcy

August 11, 2011

By Catherine New

Alabama's massive sewer debt crisis is coming to a close. Commissioners of Jefferson County voted 4-1 on Friday to accept a term sheet with creditors, allowing it restructure and partially write off its $3.14 billion debt, the Birmingham News reported. The decision provides a framework for a formal deal and signals that -- for now -- the county will not file for Chapter 9 protection. Had it done so, it would have been the largest municipal bankruptcy in U.S. history.

The deal brings state lawmakers into the negotiations, and county commissioners say bankruptcy is still a possibility. A central tenet of the settlement increases sewer prices for residents over the next several years, including an average $3-a-month increase in citizens' wastewater bills in the first year of the rate hike. The settlement also outlines a program for low-income assistance.

More Muni Defaults Down the Road?

While municipal bankruptcies are relatively rare, analysts are divided on whether muni bonds are in danger of experiencing widespread defaults in the future. Since 1980, there have been just 254 municipal Chapter 9 filings, mostly by small special-tax districts and municipalities, according to James E. Spiotto, a bankruptcy expert and attorney with Chicago law firm Chapman and Cutler. One third of these have been dismissed, he says. But could that change?

Earlier this year, one banking analyst predicted that there would be as many as 100 municipal bankruptcies this year. Jamie Dimon, head of J.P. Morgan Chase & Co. (JPM), was also gloomy about muni markets, cautioning investors in January about the $2.9 trillion market. The bank is the third-largest underwriter of muni bonds, notes Bloomberg.

Is Muni Market Reform Needed?

While much of the financial disruption from Jefferson County's debt crisis has already been priced into the market, securities expert Joseph Fichera, a senior managing director and CEO at Saber Partners, told DailyFinance, the financial woes in Alabama underscore how problems in one part of the market can have system-wide effects.

A recent story by Bloomberg reported that 80% of all financings for muni bond deals are negotiated in private, allowing conflicts of interest to prevail.

Fichera said a lack of uniform and accepted accounting standards among issuers, along with fragmented regulation and enforcement in a diverse and complicated market -- with players as small as school districts and as large as multibillion-dollar capital improvement projects -- hurts both the good and the bad. Investors are exposed to more risk than they believe, costs go up, which causes raised taxes.

"Everyone gets tarred with the same brush," Fichera said.

"The presumption that the Jefferson County problem is everywhere or nowhere else is naivete," he said. "It shows there are a lot of underlying problems." "The muni market isn't as transparent as other markets with greater regulation and more active oversight", he said. "It is an extreme example, but one that it should be a warning sign that there could be other problems elsewhere. Issuers and investors need to be more diligent."

© 2011, Daily Finance, September 16, 2011