Alabama, Municipal Debt and ElectriCities

Outside of football, I don't pay much attention to Alabama. But, my morning newsfeed captured this story on Jefferson County (which includes Birmingham) and its municipal debt woes. Here's a brief synopsis of the situation, and please stop me if the set-up to this story sounds familiar:

  • In 1995, Jefferson County entered into a consent decree with the EPA regarding sewer overflows into the Cahaba River watershed. In response, Jefferson County issued $3.2 billion of debt to fund a massive upgrade of its sewer system.
  • In 2002 and 2003, Jefferson County entered into some interest rate swap agreements (derivatives) to take advantage of incredibly low short-term interest rates.
  • The interest rate savings were short-lived and the interest rates on the $3.2 billion of debt ballooned.
  • Now, Jefferson County is considered one of the most indebted municipal governments in United States history, with a current debt of approximately $7,000 for each man, woman and child residing in the county.
  • In February of this year, S&P lowered its rating of Jefferson County's bonds to "junk" status, and as of March, Jefferson County moved into technical default on its debt obligations.
  • Many sewer-system customers, whose fees have risen by more than 300 percent in the last decade, had complained to county commissioners by phone, fax and email.
  • Jefferson's County Commissioners are (1) unwilling to raise sewer rates beyond scheduled increases, (2) unwilling to levy new taxes to reduce sewer debt, and (3) will not cut personnel.
  • Jefferson County is currently negotiating with the debtholders to rework the debt and stave off filing Chapter 9 bankruptcy.

Fortunately, ElectriCities doesn't appear to be close to this disaster -- management was able to reverse its previous folly by reducing ElectriCities' exposure to variable-rate debt and auction-rate debt. (As an aside, this is a lot like the arguments for or against the Surge...)

But I do wonder if (1) its Board of Directors is aware of the eerily similar situation in Jefferson County, and (2) if they're asking the right questions about debt service, about the future, and about the options for managing this entity. And, again, I'm left wondering who's watching ElectriCities...