BRADENTON, Fla. – The Alabama Supreme Court has given initial clearance for Jefferson County to return to the bond market for the first time since emerging from bankruptcy in 2013.
The Supreme Court
The decision upholds a bill passed by the Alabama Legislature in 2015 authorizing the county to refund the school warrants, a move that will restructure the debt and provide the county with additional revenue.
The ruling is "good news," County Commission President Jimmie Stephens said in an interview. "It is a transitional moment for Jefferson County."
By restructuring the limited-obligation school warrants, Stephens said the cash-strapped county will be able to recoup about $35 million of the $77 million it lost annually when an occupational tax was struck down in a 2011 court case.
Jefferson County suffered severe cash-flow problems after losing the occupational tax revenue, a primary factor in its decision to file for Chapter 9 bankruptcy.
Although the county restructured its debt and exited in 2013, an appeal of the bankruptcy plan is pending before the 11th Circuit Court of Appeals.
"This is the first additional revenue that the county will be able to have to improve the quality of life for its citizens," Stephens said. "I believe this will help us rebuild our infrastructure and also have money available for economic development opportunities."
The Alabama Supreme Court ruling will not be final for 14 days, a period during which the litigants who challenged the constitutionality of the school warrant refinancing can request that the court reconsider its decision.
The case could, however, drag on for many years.
"We are investigating whether there is a basis for appeal to the U.S. Supreme Court," attorney Calvin Grigsby said in an email Tuesday.
He did not say what legal avenues are being explored to challenge the case further.
Grigsby, who represents four local taxpayers and elected officials seeking to upend the Legislature's 2015 bill, also did not say if his clients would ask the Alabama Supreme Court to reconsider its ruling.
The four plaintiffs are among 13 residents represented by Grigsby who are appealing Jefferson County's 2013 bankruptcy plan of adjustment.
They are challenging the Chapter 9 restructuring of the county's sewer system, particularly a provision that retains bankruptcy court oversight over future sewer rates.
Grigsby said that if the county is allowed to refinance the school warrants, it will shift $2.3 billion in local sales tax revenues from public education to Jefferson County's general fund and other non-educational projects, including money that will be directed to the county's legislative delegation.
He did not explain how he calculated the $2.3 billion figure, or if it included funds that will be distributed annually to local school districts after the refunding.
The state law allowing the warrants to be refinanced "is only applicable in Jefferson County where a majority of the school kids who are lagging behind national test score averages are African-American," said Grigsby, who has contended in the past that Jefferson County does not need the new revenue.
In 2004 and 2005, Jefferson County issued a combined $1.05 billion of limited obligation school warrants.
The proceeds were lent to 13 school districts in the county to pay for capital improvement projects or to retire their own debt.
About $500 million of the limited obligation school warrants are outstanding.
The debt is secured by a dedicated, local 1% educational sales tax that will be terminated with the refunding.
It will be replaced with a new, general 1% sales tax authorized in the 2015 bill that will enable the county to use excess tax revenues for other purposes.
Approximately 40% of the general sales tax revenues will be used to pay debt service on the refunding warrants, while the remainder of the tax collections will be distributed to various entities.
The county will receive about $36 million a year to pay for transportation, other capital projects and economic development projects.
Another $18 million a year of sales tax collections will be divided among the county's school districts to be for capital projects or operational needs.
Tax revenues will also support other programs, including the United Way, the Birmingham-Jefferson Transit Authority and the Birmingham Zoo.
The school refunding warrant deal is unlikely to be affected if the county's bankruptcy appeal remains unsettled, municipal analyst Matt Fabian said.
"It shouldn't be a major concern for the new deal pricing," said Fabian, a partner at Municipal Market Analytics.
Fabian said the bankruptcy appeal is really a concern for the county's sewer bondholders because it involves a provision in the bankruptcy plan that allows them to "take an ongoing role in ensuring rate covenant satisfaction" through the court.
"Even if [the bankruptcy appeal] were to go against the county and thus bondholders, it only means that holders are subject more directly to the county's willingness to raise rates," he said. "That may not be a risk sewer warrant holders are willing to take, but it wouldn't throw the county back into bankruptcy."
Oral arguments in the bankruptcy appeal were heard Dec. 16 by the 11th Circuit Court of Appeals.
A ruling could come any day that will determine if the appeal of the county's bankruptcy plan is moot.
Stephens said he would like to county to issue the school refinancing warrants in May or June, after the Alabama Supreme Court's ruling becomes final.
"We're anticipating a successful return to the market, and we're assuming all markets are forward-looking and looking at our audits," he said, referring to how county commissioners have managed finances.
The last time the county was in bond market was in late 2013 to issue $1.8 billion in sewer refunding warrants to write down $1.4 billion of the sewer system's debt, a step that enabled the county to exit bankruptcy.
With the sale of the new sewer refunding warrants, the county promised to release its comprehensive annual financial reports by June 27 each year, or about eight months after the Sept. 30 end of the fiscal year.
With the exception of 2013 - the year the county exited bankruptcy - the CAFRs have been released in March.
Stephens said the 2016 CAFR will be released in the next few weeks, giving prospective bondholders time to evaluate the county's financial condition prior to pricing of the school refunding warrants.
Analysts at Fitch Ratings said they have seen evidence of improvement in Jefferson County's financial management with new systems of accounting and tracking in place.
"Since Jefferson County's bankruptcy, officials have put finances on a strong footing," Fitch said in a May 2016 review of the county's A issuer-default rating.
Stephens said the $500 million refunding warrants are expected to have more than 3 times coverage from the 1-cent sales tax.
"We are generating over $100 million a year" in sales tax revenues, he said.
The limited obligation school warrants currently are rated Baa3 by Moody's Investors Service and A-minus by S&P Global Ratings. Both have stable outlooks.
The county's financial advisor is Public Resources Advisory Group.
In the next few months, the county plans to issue requests for proposals seeking bond counsel and underwriters for the school warrant refunding deal.
"We feel Jefferson County is well on its way back with this initial foray into the market," Stephens said. "Fiscal responsibility will always be in the forefront for the county commission."
