Opposing lawyers for Jefferson County, the debtor in the largest Chapter 9 municipal bankruptcy case ever filed, and the holders of its sewer warrants squared off last week in the ongoing fight over control of the County’s sewer system and the right to its revenues. (Expert witness Jay Goldin provided a notable link back to the New York City fiscal crisis of the 1970’s.) The dispute over the County’s sewer system, with it’s underlying tale of corruption and the use of complex derivatives gone rampant, has garnered nearly all of the attention that has been focused on the County’s financial travails and its Chapter 9 case.  

In some ways, however, the sewer system disputes are a sideshow. The true source of the County’s present dire circumstances lies in the invalidation last year of the County’s occupational tax that had accounted for nearly 40% of its general revenues. The sewer system may be a veritable Gordian knot, but it is essentially self-contained. The holders of the sewer warrants have no recourse against the County’s general revenues. The loss of the funds from the occupational tax, however, has left the County virtually non-functional, barely able to provide basic governmental services

The crisis can be alleviated only by the Alabama State Legislature. Under Alabama law, the County has no authority to replace the tax. The Legislature’s current session is rapidly drawing to a close, and no relief for Jefferson County appears to be at hand.  

The sewer system dispute will probably generate precedential opinions from the Eleventh Circuit Court of Appeals, which will widely influence and affect the course of Chapter 9 cases going forward. But regardless of how the sewer system dispute gets resolved, Jefferson County’s only hope of being able to emerge from Chapter 9 with a feasible plan of adjustment lies with the State Legislature.