Jefferson County, Alabama, which has struggled to avoid municipal bankruptcy, said that a $50 million settlement with JP Morgan Chase & Co won’t be enough to cover its potential general fund liabilities.
The troubled county may have to refund over $50 million in disputed occupational tax revenue and pay $29 million to replace a surety-bond after a reduction in credit rating from Ambac Assurance Corp. The company’s finance director, Travis Hulsey, said in a memo to county commissioners.
Tax collections in the county are down $7.9 million from 2008.
Jefferson County, AL, which includes Birmingham has more than 600,000 residents and is on the brink of insolvency because of interest-rates on more than $3 billion worth of floating-rate sewer bonds that soared the companies that insured their debt lost their top credit-ratings.
Interest-rate swaps that were setup by JP Morgan compounded the debt crisis when payments to the country under the contracts fell and the market of value of the swaps plunged.
Derivatives are contracts where the investments value is derived from the value to stocks, bonds, loans, currencies, commodities, or are tied to specific events such as interest rate changes. One of the most common types of derivatives, interest rate swaps, are agreements to exchange interest rate payments with a bank or insurance company. Typically they are involve trading fixed rate payments for floating rate payments.
It’s also possible that the county may have to send as much as $43 million in earnings from the investment of school bond proceeds to the U.S. treasury. IRS rules prevent municipalities from profiting by investing the proceeds of tax-exempt bonds in higher yielding securities. Earnings from the practice, known as arbitrage, must be repaid to the federal government, or interest on the debt could be subject to federal tax.
Hulsey wrote, “The county is investigating the potential arbitrage rebate liability on the school warrants approximating $43 million of excess earnings above the yield on the warrants.”
JP Morgan agreed to a $722 million settlement with the SEC last month to end a probe related to derivative sales in the county. In addition to paying $50 million to the county, the bank agreed to cancel $647 million in fees that the county faced to cancel the transactions.
