* 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 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
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
"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.
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)