Munis And Jefferson County Alabama

Remember Jefferson County, Alabama, the county that embarked on a sewer renovation program which ultimately led to the largest government bankruptcy in US history. It’s a long story which is summarized here, but the bottom line is it involved a fair degree of larceny on the part of lobbyists and government officials as well as the use of financial engineering far beyond the ability of the local folks to understand. So, they’re emerging from bankruptcy and they’ve learned a good lesson, right. Well apparently not.

The county’s plan to emerge from bankruptcy protection hinges in part on the sale of $1.9 billion of new debt this fall to refinance debt tied to its troubled sewer system. But some observers call terms of the new debt onerous.

The proposal for the refinancing, which has been approved by a majority of county commissioners, includes a set of bonds that schedule larger debt payments in the later years of the financing. About $474 million are a type of debt called capital-appreciation bonds. Such bonds have been derided by California’s treasurer as “terrible” for their back-loaded payments, and Michigan has banned their sale by municipalities.

All told, Jefferson County taxpayers would stand to repay nearly $6.9 billion over the four-decade term of the financing, more than three times the amount the county initially plans to borrow. That is perhaps billions more than they would pay under a plan whose payments would be more evenly distributed, said a potential investor.

Almost always and everywhere capital appreciation bonds have been toxic. The few successes, and I use that word advisedly, have been in municipalities with rapidly growing populations which could expect to see growing tax receipts and for which the need for capital improvements was immediate and imperative. Jefferson County meets none of those criteria. It is not growing and the sewers are already in.

So why go down this road? Frankly, I can’t figure out a good economic reason. Apparently they’re unable or believe that they would be unable to amortize the new debt in a traditional manner. But if that’s the case why not make that argument to the court and argue for a reduction of the new debt required by the settlement.

One is left to assume they negotiated the best deal possible and the court was persuaded  the county could indeed shoulder this new debt load. Indeed it might have been possible to do so but at significantly more cost to the residents of Jefferson County in which case the local officials are signing off on the capital appreciation bonds as a matter of political expediency, something with which they appear to be woefully experienced.

The good citizens of Jefferson County and their legislators are entitled to choose their own path and if that leads to further wrack and ruin then that is their problem. For the rest of us, well we should probably get a lot more cautious about munis. That plain vanilla general obligation bond you have your eye on might be part of a liability structure which can bring the whole house of cards down. Or as we may learn from the Detroit mess, health and pension obligations might not be modifiable in a bankruptcy proceeding if state constitutions hold them inviolable, thus leaving the entire burden of restructuring on the shoulders of bondholders. Try getting any recovery in that case.


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