Bonds or Funds? Wall Street Takes on Jefferson County

Jefferson County AlabamaThe case is sending red flags up in municipalities all over the United States. In the middle of the worst recession in decades, Jefferson Count, Alabama is attempting to file for Chapter 9 bankruptcy.

Since June, dozens of county employees have been laid off without pay. The county is buried in litigation as the employees seek compensation. The county’s creditors are coming after them, attempting to block the bankruptcy.

At the center of the dispute is, of all things, is the county’s sewer system. Its finances are out of control, with over $3 billion in debt. The population of the county is at around 660,000. That means that if every citizen of the county were asked to pay the sewage system’s debt, the bill would stand at $4550 per taxpayer.

While journalists struggle to write the most creative “flushing money down the toilet” pun for the evening news, the most populous county in Alabama continues to struggle.

A hearing is scheduled before the Alabama Supreme Court to determine if the county has the right to file for Chapter 9.

The question pivots on whether that sewage debt consists of bonds or debts. Alabama law prevents its counties from declaring bankruptcy unless they have issued refunding or funding bonds. Jefferson County clearly is not in that position. However, the County is still appealing to the Supreme Court.

Meanwhile, judges and county officials are running through their own massive “means test” to determine if the county has the capacity to pay its debts or not. That is right—whether an individual is filing for bankruptcy or a municipality, a means test must be passed. A municipality has the same obligation to pay its debts as that municipality’s citizens.

Jefferson County’s debt is held on Wall Street, specifically at JP Morgan Chase and the Bank of New York Mellon Corp. Both companies will likely stand before the Alabama Supreme Court arguing whether the county can default on its debt.

The outcome, at this point, is still up in the air. The case itself, however, is telling. Jefferson County is one of many municipalities in the United States to attempt bankruptcy this year. As the US economy grows insolvent, essentially on life support as the Federal Reserve willingly raises the national debt to prevent depression, smaller municipalities struggle to pay the bills.

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