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Jefferson County Readies Sewer Debt Plan

BRADENTON, Fla. - Negotiators for Jefferson County, Ala., are preparing to take a complex plan to Wall Street they hope will restructure the county's troubled $3.2 billion of outstanding sewer debt, most of which is in auction- and variable-rate securities.

The plan primarily will consist of refinancing approximately $900 million of sewer debt with revenue from an existing sales tax and refinance about $700 million of sewer debt with revenues from an existing occupational license tax, while stabilizing the remaining debt with a portion of sewer revenue fees, a source familiar with the plan said yesterday.

"It is important here to have two objectives in mind," the source said. "Number one is to solve the short-term debt crisis and number two is to solve the problem and have a viable sewer system in the future."

Use of the sales tax and occupational license revenues will require action by the Legislature in a special session, as well as a statewide referendum to amend the Alabama Constitution. Jefferson County commissioners have not approved the plan.

"In order for the county to access the resources necessary to solve this crisis, a constitutional amendment will be necessary to release it from the straitjacket of the 1901 constitution," Birmingham lawyer Bill Slaughter told the Birmingham News. "Time is of the essence because the creditors of the county will not wait much longer."

Part of the goal of the new plan is to stabilize the cost increases of sewer bills for ratepayers, who have seen rates increase more than 300% over the last 11 years.

The new proposal is designed to "offload" a major portion of the sewer debt, by refinancing it with other revenues, and secure a "reasonable" amount of debt with fees collected by the sewer system. The plan is expected to be presented in New York later this week.

Jefferson County is Alabama's most populous county, and 21 of the 35 municipalities within it are served by the sewer system, including Birmingham.

The county has seen debt service costs rise dramatically since early this year because of fallout from the subprime mortgage mess and downgrades of bond insurers. In addition, the $3.2 billion of sewer debt is covered by $5.4 billion of out-of-synch swaps.

The county has negotiated three forbearance agreements with banks and swap counterparties, delaying some payments. The latest forbearance agreement expires July 31, but county officials have indicated that they are seeking a fourth delay in payments, if banks and counterparties agree.

The delay is a result of county commissioners July 8 vote to terminate relationships with their top negotiators on the sewer bond crisis - financial advisers Merrill Lynch & Co. and Porter White & Co., and the law firm of Bradley Arant Rose & White LLP.

The terminations came shortly after some details about the county's first restructuring plan were released, including a locally unpopular proposal to raise sewer rates 2.85% a year and creation of a sewer system oversight board with the authority to set rates. The first plan also suggested using a general fund subsidy of up to $10 million, if needed, to help pay for sewer system operations.

At the same time commissioners terminated their negotiators, they hired Sterne Agee & Leach Inc. and Morgan Keegan & Co. as two of three investment banking firms to be paid only if the sewer bonds are refinanced. Citi is expected to be the third member of the new financing team. So far, the county has not hired a new financial adviser.

In addition to the investment banking firms working on the sewer debt problem, the commission earlier this year hired Balch & Bingham LLP as disclosure counsel and Haskell, Slaughter, Young & Rediker LLC as counsel. Both firms have served as the county's bond counsel on various bond issues.

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