County Failure Warning

The start of municipal government failures could soon be upon us. Meredith Whitney has created a storm with her dire predictions, and Nouriel Roubini’s analysis firm has also issued a serious warning about muni debt. We’ve covered the issue on our blog as well. The big question is when will the wave begin.

Part of that answer may be coming soon. The WSJ ran a story Tuesday about an Alabama County on the verge of a bankruptcy that would dwarf Orange County’s bankruptcy in 1994:

Officials of Alabama’s Jefferson County are expected to meet with state lawmakers Wednesday to discuss how to avoid filing the largest municipal bankruptcy in U.S. history after a court disallowed a local tax. The county, which has said its expenses will exceed its income by sometime in July, has been staving off bankruptcy for about three years, after absorbing $3.2 billion of debt resulting from a series of corrupt and disastrous decisions in financing a sewer-improvement project.

But its fate grew considerably bleaker earlier this month when the state supreme court affirmed a lower court ruling that a local occupational tax is unconstitutional. Losing the tax will leave the county with a revenue shortfall that is about a third of its operating budget. The lost tax revenue represents roughly 44% of the revenues the county actually has control over for general operations due to the “earmarking” of most revenues for various purposes, said county finance Commissioner Jimmie Stephens.

Of course not everyone is as concerned about this and the Whitney/Roubini warnings. Even though there has been a steady decline in the muni market over the past five months, some investors see this as a buying opportunity. From Reuters:

This is exactly the right moment for long-term investors to snap top-rated bonds offering tax-equivalent returns of as much as 9.5 percent, argued Hugh McGuirk, head of the municipal bond team at T. Rowe Price, with more than $439 billion under management. “There are pockets of opportunity for the long-term oriented investor. You can buy a AAA Harvard 30-year bond at 5.0 percent today, and that’s a taxable-equivalent yield of around 8.0 percent,” McGuirk told Reuters in an interview.

See the whole Journal story on the potential Alabama County bankruptcy proceedings here.