Jefferson County's Bankruptcy Is A Blow to Birmingham

In a Nov. 11, 2011 article from Bloomberg, we learn that  Birmingham, Alabama, once, the most prominent industrial center in the Southeast has been on a long losing streak that just got longer.

Daimler AG opened a Mercedes-Benz factory in Vance, in 1997,one county west of the state’s biggest city. Honda Motor Co. put a plant to the east, Toyota Motor Corp. to the north and Hyundai Motor Co. to the south. Birmingham lost its minor-league baseball team to a suburb in 1987, and the Iron Bowl football game in 2000. Plans for an entertainment district foundered. The city’s population plummeted almost 13 percent since 2000, even as the state grew.

The Bloomberg article goes on to say that Birmingham is also the seat of Jefferson County, which filed the largest municipal bankruptcy in U.S. history under the burden of more than $3 billion of sewer-system debt. The so- called Magic City may need a big trick to persuade residents and businesses that its days of losing are over.

“I hate that we filed for bankruptcy -- it’s that whole continuation-of-a-stigma thing,” Steve Mitchell, a 52-year-old Alabama native who works in health-care banking, said at a downtown food court. “There’s this negative connotation, and we’ll be viewed that way." Birmingham was once a manufacturing center.

Over the ensuing years, its steel-making industry withered and its housing and infrastructure decayed. In 2010, the city had a population of 212,237, down 12.8 percent since 2000, according to the U.S. Census Bureau. Jefferson County, which encompasses 33 municipalities, had 658,460 people.

The slide to bankruptcy began in 1996, when the county was forced to rebuild its sewer system after pollution was found spewing into rivers. Risky derivative financing for the project backfired beginning in early 2008, leading the county to become one of the biggest casualties of Wall Street’s credit crisis. Birmingham’s mayor said he knows he must pull his city out of Jefferson County’s shadow.

“We are a separate entity,” Mayor William Bell, a former county commissioner who took office in January 2010, told reporters yesterday. Birmingham’s “financial status is very sound. We have more than enough money to carry out our day-to- day operations.”

Birmingham, with 4,160 employees and a $371 million general-fund budget for 2011, carries Moody’s Investors Service’s third-highest bond rating at Aa2.

Jefferson County’s bonds are rated 14 levels lower: Caa1, below investment grade.

Jefferson County’s revenue in the fiscal year that ended in September totaled $152.5 million, down from $207.2 million the previous year. The county has cut about 450 positions since June to bring the workforce to 2,687 employees. More cuts are coming next month, Commission President David Carrington has said.

Mayor Bell said he’ll meet with heads of businesses beginning next week to clarify the city’s financial standing and to distance it from the bankrupt county.

Birmingham’s companies have struggled along with the region. City-based firms compose almost 90 percent of the Bloomberg Economic Evaluation of States’ Alabama stock index based on market capitalization. So far this year, the index has fallen about 24 percent, compared with about 1 percent for the Standard & Poor’s 500.

Residents are torn as to what bankruptcy will mean.

“It’s a sad day for Birmingham and for Jefferson County,” said Sophia Faulk, owner of Sophia’s Deli and Catering across the street from the county’s offices. “I’ve never seen people so unhappy.”

Hilson of the Business Alliance said the city, which has weathered so much, will outlast this storm.

“All of the positive attributes of the community in time will overshadow what has happened and is happening now, but that’s going to take some time,” he said. “It’s certainly not going to be an overnight fix.”

Bond problems

A deal with the county's creditors in September,  including JPMorgan Chase, saw lenders agree to forgive about $1bn in debt, with the county refinancing another $2bn, and a series of sewer rate increases.

The negotiations ended some $140m short as terms of the deal shifted, increasing the repayment amount from $2.05bn to $2.19bn.

Jefferson's mounting debt issues were brought on by a combination of increasing interest rates on bonds, turbulency in the derivatives market and corruption among local government officials.

At least 21 people, including four former county commissioners, have been convicted or pleaded guilty to corruption-related charges in connection with the sewer's construction and bond financing, according to Bloomberg News.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with  Jefferson County Bonds, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.