Financial crisis shock waves hit municipalities (Jefferson Co., Ala., may be headed for bankruptcy)

[Pale Blue Dot]

Source: MSNBC

It's not just on Wall Street where dubious financial decisions are creating casualties. Municipalities, many of which made enormous financial promises when the economy was strong, are now confronting heavy fiscal burdens. When the last major bank crisis hit public coffers in the late 1980s, 33 municipalities declared bankruptcy. And despite only eight municipal bankruptcies since 2005, some experts believe that Wall Street's troubles could soon squeeze a growing number of municipalities, which will be forced to cover bond payments and outlays to retirees. One prime example of this problem is Jefferson County, Ala., where the state's largest city, Birmingham, is located. The county is now saddled with $3.2 billion in debt from sewer upgrades and finds itself on the brink of becoming the largest municipal bankruptcy in U.S. history.

The current troubles began in 1993 when Jefferson County was sued by residents living near the Cahaba River, who claimed that the county's sewer systems were pumping raw waste into local streams. The county settled the suit three years later, agreeing to fix the situation by overhauling its sewage system and to issue bonds to fund the project. "We didn't know what was under the ground," says Jefferson County Commission President Bettye Fine Collins, who has been on the commission since 1994 and voted against settling the case. The county was forced to rebuild or replace sewer systems in the 22 municipalities inside its borders and agreed not to seek financial assistance from the cities. Some of the systems were found to have clay pipes that had been underground since the first sewers were laid in the early 1900s.

Heeding the advice of financial advisers, Jefferson County officials agreed to restructure the bond debt earlier this decade, moving from a fixed to a variable interest rate. Additionally, the county spent more than $100 million for interest rate swaps, designed to keep the bonds' rates low. Unfortunately, the swaps backfired as interest rates soared amid the spreading credit crunch and ratings agencies lowered Jefferson County's bond ratings. That drastically boosted the county's bond payments.

County commissioners are now struggling to reach an agreement to restructure their bond debt before they default and are forced into bankruptcy on Sept. 30, the day the county's forbearance agreement expires. For the past seven months, Jefferson County has been negotiating with the six banks that hold the county's sewer bonds, most of which are held by JPMorgan Chase (JPM). Jefferson hopes to ease the burden of high interest rates by asking banks to exchange the county's auction-rate securities for securities with a 3.8 percent fixed rate and by asking JPMorgan and Bank of America (BAC) to buy back some or all of the $2.2 billion of the county's auction-rate securities.


Read more: http://www.msnbc.msn.com/id/26946065/

[madrchsod]

1. jpm owns the county

soon they`ll own a lot of this country

[dipsydoodle]

2. This is just the start of the fear/blackmail crap

to encourage passing a completely pants bailout deal.

[Auggie]

3. When do Halliburton or Bechtel take over?

Privatization, of course.

[WriteDown]

4. Yet another reason....

I vote "NO" on every bond referendum that comes up.

[soothsayer]

5. I've seen this headline for months. This isn't anything new. They're idiots for doing those swaps.

[dixiegrrrrl]

6. This is actually old news,

Papers down here have been talking about the bankruptcy issue for many many months, long before the market dropped.

[Winterblues]

7. But but but I thought it was just bad minority loans that were the problem...

When whole municipalities can't pay their loans what does that say? Oooops.

[Igel]

9. It's what happens when they're reckless. Or when they're

imposed upon, as in this case (it seems).

Consider California's budget crisis. Or what New York's having to do,given that many of the investment firms employees provide a big chunk of state and city tax revenue ... and consumer spending.

The budget problem in this case is of long standing. So people act like it's expected. But there's something new: There's a tried-and-true way out--restructuring the debt--which is rendered harder, and possibly, by a credit crunch. Now, lenders usually don't mind restructuring the debt--they get more out of it than they do by forcing bankruptcy. But in this credit environment, lenders are increasingly concerned with staying liquid. So while the "root cause" is reckless budgeting by court and council, the proximate cause is an inability to restructure the debt. It pays never to forget both kinds of causes.

[Festivito]

8. Who will take over municipal water systems? Hmmmm?

Oh, yeah, Halliburton is a piping company.

Maybe they'll help.

:sarcasm: