In a resolution placing blame square at the feet of the Alabama Legislature, the Jefferson County Commission voted Wednesday to default on its next general obligation debt payment, more than $15 million due on April 2.
The decision is an important moment in the county’s financial struggles. Unlike the variable rate demand warrants, which the county defaulted on last year, these debts are owned by more than merely Wall Street creditors. So-called “mom and pop” investors own general obligation warrants — investments that will no longer have a return, at least for now.
Also, the general obligation debt is separate and different from the county’s sewer debt. On Wednesday, the county’s lead bankruptcy lawyer, Kenneth Klee, emphasized that the sewer crisis has nothing to do with this default. Rather, this default is solely caused by the loss of the county’s occupational tax to court challenges and legislative ineptitude.
In bond markets, general obligation debt has been among the safest bets an investor could make. The debts are supposed to be backed by the full faith and credit of the particular government issuing them. However, without home rule, Jefferson County does not have the power to do whatever possible to pay the debts, Klee said. Curiously, neither do many counties, not just in Alabama, but throughout the nation. If the markets consider the implications of that fact, the impact of Jefferson County’s default could have a ripple effect throughout Alabama, and even the country.
The county has slightly more than $200 million of general obligation debt. Payments on that debt are due every six months.
If the Alabama Legislature does not provide the county with a new revenue steam, likely a replacement occupational tax, the county’s path out of bankruptcy becomes difficult if not impossible, Klee said. First, the commission would have to determine whether it is even possible for the county to live without that revenue stream, he said. If not, the outcomes become more drastic, including the dissolution of Jefferson County as a governmental entity.
Klee said that scenario is unlikely. “But it is one of the things I think about,” he said.
Commission President David Carrington said today’s decision was the most significant for the county since the commission voted to file for Chapter 9 bankruptcy last year.
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