Tax Law

State Net Capitol Journal – November 25, 2013; Budget & Taxes: Alabama Bond Sale May Establish Bankruptcy Template

Budget & Taxes

AL BOND SALE MAY ESTABLISH BANKRUPTCY TEMPLATE: Jefferson County, Alabama sold $1.8 billion in bonds this month. What's particularly noteworthy about that is the county has been in bankruptcy since November 2011, after defaulting on $3.1 billion in sewer-revenue debt. The bond sale is part of the city's plan to exit bankruptcy by the end of the year. And if successful, it could become a model for other bankrupt municipalities.

"To sell new bonds while you're in default on the old bonds, it really hasn't happened before," said Matt Fabian, managing director at Municipal Market Advisors.

Jefferson County's unique bankruptcy exit plan calls for the Federal Bankruptcy Court in Birmingham to retain jurisdiction over the $1.8 billion in debt for its entire 40-year term; if the county ever falters, the court would have the power to enforce rate increases to generate the revenue needed to pay back the debt, with interest.

"Without the assumption of court protection, the financing would have been more difficult, if not impossible," Fabian said.

Jefferson's proposal is so unusual that there's been considerable variation among the nation's three largest ratings agencies about how to evaluate the county's debt. Standard & Poor's rated it at the low end of its investment-grade scale, either BBB or BBB-minus, depending on whether or not it is insured. (The Assured Guaranty Municipal Corporation charged $26 million to insure about $500 million of the $1.8 billion.) Fitch, however, rated the debt at the high end of its junk-grade range, BB-plus if insured or BB if not. And although Moody's Investors Service wasn't hired to rate the debt, it issued a special report stating a rating as low as B seemed appropriate, meaning the debt carried a "substantial-to-high credit risk."

Potentially more problematic for Jefferson is that Alabama's Attorney General has said the county's existing sewer rates are unconstitutional, let alone higher ones in the future. And there's apparently no precedent for a clash between a state constitution and a federal bankruptcy ruling.

But the county told the bankruptcy court its plan should be approved because "it is the result of extensive, arm's-length, and good faith negotiations" and its creditors overwhelmingly approved it. The county will also now be able to point to its successful bond sale as proof that the markets believe the plan is feasible. (NEW YORK TIMES)

STATES LABORATORIES OF HEALTH CARE FINANCE: Under a program created by the Affordable Care Act called the State Innovation Models Initiative, six states — Arkansas, Maine, Massachusetts, Minnesota, Oregon and Vermont — began testing new health care financing models this year. Colorado, New York, and Washington will be next up to try their cost-containment experiments, with another 16 states waiting in the wings.

About $10 billion of the ACA's $1.8 trillion projected total cost is devoted to the program, which is overseen by the U.S. Department of Health and Human Services.

"The idea is to take governors up on their claim that states are the laboratories of democracy where meaningful innovations can occur," said Susan Dentzer of the nonprofit Robert Wood Johnson Foundation.

A common thread among the state approaches is getting more people connected to "patient-centered medical homes" where "care coordinators" can ensure they receive proper preventive care, and managing chronic illnesses such as diabetes and heart disease with medicine and lifestyle changes instead of expensive hospitalization.

But some states are also trying other things. For instance, Vermont intends to find out if it can reduce health care costs by spending more on schools, on the premise that people who are more educated tend to be healthier (STATELINE.ORG)

AK CONSIDERING INVESTING BILLIONS IN PIPELINE PROJECT: A study commissioned by the state of Alaska that was released last week suggested that a direct investment by the state in a long-sought liquefied natural gas pipeline project might improve the project's prospects.

The $424,000 study, conducted by a team that included New Hampshire-based oil consultant Daniel Johnston & Co. Inc., found that state investment — in the range of $9 billion to 13.5 billion — could "align" the state's interests with those of oil producers Exxon Mobil, BP and ConocoPhillips and pipeline company TransCanada Corp., reducing their project costs. But the study also found that investment in the project, which includes an 800-mile large-diameter pipeline from the North Slope to South-central Alaska and a plant to prepare the gas for shipment to markets in Asia, would potentially open the state up to "additional risks."

Consequently, some lawmakers are cautiously optimistic about the idea.

"I want to see a real ownership interest," said Rep. Beth Kerttula (D) the House minority leader. "I want to see the state at the table. I want to see the state getting the information that's fundamental to being sure that the state gets its rightful return. I also want to be sure that we have an absolute say in the decision-making."

A former state oil and gas lawyer, Kerttula added that she didn't want to see the state "bankroll multinational companies that don't need bankrolling" but that the state's lack of an ownership stake in the trans-Alaska pipeline, completed in 1977, has placed it at a disadvantage in dealings on that project.

"The state always ended up on the short end of the stick under thousands of boxes of documents," she said. (ANCHORAGE DAILY NEWS, STATE NET)

BUDGETS IN BRIEF: After a furious week of debate, the PENNSYLVANIA House and Senate approved HB 1060, a bill that provides $2.4 billion for repairs to the state's aging roads, bridges and mass transit systems. The revenue will come from a hike in the cap on the oil-franchise tax and an increase in driver's-license and vehicle-registration fees, as well as a surcharge on speeders and other traffic violators. Gov. Tom Corbett (R) said he will sign the bill this week (PHILLY.COM). • Days after WASHINGTON lawmakers cleared the way for Boeing's planned 777X jetliner by approving $8.7 billion in tax breaks and incentives for the company, the Seattle-based members of the International Association of Machinists and Aerospace Workers Union rejected a contract that would have guaranteed 20,000 jobs but called for major cuts to future pension and health-care benefits. The company is reportedly now looking for alternative locations for the 777X site, with Long Beach, CALIFORNIA among the most likely prospects (SEATTLE TIMES, WALL STREET JOURNAL, STATE NET). • CALIFORNIA legislative budget advisors released a report last week indicating the state's finances are improving faster than expected and the state is now in better budget condition "than at any point in the past decade." The state could end the current fiscal year next June with a surplus of $2.2 billion, more than double the size of earlier estimates (LOS ANGELES TIMES).

- Compiled by KOREY CLARK

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