Alabama county says debt downgrade unwarranted

Wed Apr 20, 2011 5:50pm EDT

* S&P downgrades school debt from BBB to BBB-minus

* Jefferson County faces separate $3.2 billion bond debt

* County says will run out of general funds by end July

By Matthew Bigg

ATLANTA, April 20 (Reuters) - A downgrade of debt held by Alabama's Jefferson County is unwarranted because the bonds are secure, the president of the troubled county's commission said on Wednesday.

Jefferson County, which is home to Birmingham, Alabama's biggest city and a mainstay of its economy, has been fighting to stave off what would be the largest municipal bankruptcy in U.S. history over a $3.2 billion sewer debt. While the decision by Standard & Poor's on Tuesday to downgrade its rating on the county's little-known school warrants compounds its woes, it is unlikely to be a decisive blow, one analyst said.

S&P cut its ratings on the school warrants from BBB to the lowest investment grade of BBB-minus and reduced the outlook on other county debt to negative.

"This downgrade makes no sense. These warrants are fully funded and secured," County Commission President David Carrington told Reuters.

Jefferson faces a separate race to reorganize its general fund finances before its cash rounds out in July following a court ruling that a key county tax is unconstitutional.

But the S&P decision is unlikely to weaken the county's ability to present a plan to creditors or to restructure its general fund finances, said Melissa Woodley, a finance professor at Samford University in Birmingham.

"Given everything else, it's not that impactful. .... It's a warning shot. We know that Jefferson County has a problem," Woodley said in an interview.

When the county issued roughly $1 billion in bonds in 2004 and 2005 to local school boards for capital construction, it pledged a 1 cent sales tax as the source of security.

As a result, the bonds are not only secure, they are insulated from other parts of the county's finances such as the sewer bond debt that spiraled in 2008 with the collapse of bond markets.

"It's a pledged tax. There's no way it can be used for anything else," said Curt Gwathney, a partner in the Balch & Bingham law firm that represents the county's education board.

The downgrade points not to problems with the individual issue but to the possible impact of wider financial troubles faced by a county.

DEBT RESTRUCTURING

Jefferson is one of many U.S. municipalities in debt trouble, but bond markets follow it closely because of the size and chronic nature of its problems.

At the core of its difficulties is a long-running struggle to restructure a bond debt the county ran up in the 1990s as it refinanced an upgrade to its sewer system. That debt spiraled in 2008 as bond markets collapsed.

S&P analyst James Breeding, in a note to clients, said the downgrade reflects "overall uncertainty regarding Jefferson County's financial condition, coupled with a recent narrowing of debt service coverage."

The agency also revised its outlook for the county from developing to negative and reaffirmed ratings on other county warrants, citing as a factor that "recent events have created another layer of financial stress."

In particular, it referred to a decision by the state Supreme Court in March that a tax that provided revenue to the county's general operating fund was unconstitutional. That ruling prompted the county to say it would run out of operating funds by the end of July.

To remedy the shortfall, it says it will pursue efficiency savings, cost-cutting measures and tax code changes but it is yet to spell out its plan in detail.

"I don't find it surprising that any of the debt is downgraded given that the funding has gone but no plan has been posited to put it back," said Andreas Rauterkus, a finance professor at the University of Alabama at Birmingham.

"If I was a creditor I would be worried too," he said. (Additional reporting by Melinda Dickinson in Birmingham; Editing by Leslie Adler)

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