BRADENTON, Fla. - Fearing Alabama's Jefferson County is on the verge of bankruptcy, Rep. Roderick Scott Tuesday urged the stateLegislature to intervene to preserve the ability of all local government entities to access capital markets.
Scott said the state should not bail out the county financially - a sentiment also expressed by Gov. Bob Riley- but it should establish debt issuance and restructuring safeguards.
The move to intervene in Jefferson County's financial crisis comes as the county's attorneys continue negotiations with bankers and bond insurers on Wall Street to find a resolution to the financial crisis caused by huge increases in interest rates on its sewer debt because of bond insurer downgrades.
Scott, a Democrat from the city of Fairfield in Jefferson County, on Tuesday filed
Sen. Steve French, R-Mountain Brook, on Tuesday filed SB 583 clarifying that public entities must receive the consent of the Alabama Public Management Authority to readjust public debt. Mountain Brook also is a municipality in Jefferson County.
"When we talk about why we're putting such a structure in place it, really stems from having access to the world's capital markets," said Scott, who holds a bachelor's degree in economics from Yale University and a master's of business administration from Dartmouth College.
Scott believes Jefferson County's problems could just be the beginning of financial troubles for public entities across the country and the implications are vast, including jeopardizing investor appetite for low risk tax-exempt debt.
Scott said one of the objectives of his legislation is to prevent Jefferson County from restructuring its debt or filing for bankruptcy without first getting permission from the state. He said it would be much more difficult for Jefferson County to recover from bankruptcy than it was for Orange County, Calif., which filed for protection from creditors under Chapter 9 in 1994.
Jefferson County has $3.2 billion of sewer debt, most of which is in troubled auction- and variable-rate securities. Jefferson also has nearly $1.5 billion in other debt that could be caught up in any reorganization through bankruptcy. Orange County had $1.7 billion in debt when it filed for bankruptcy, caused by losses on risky investments.
"We're not trying to take control of Jefferson County," Scott said, although he complained that the county has not been communicative about its financial plight or its recovery plans. "We're proposing an authority to take over financially troubled political subdivisions and local governments and put in reforms on how they are operated and return them to sound footing."
The state has a similar oversight program through the Alabama Department of Education for public school systems in financial distress, Scott said.
The county's crisis has been exacerbated by problems resulting from the subprime mortgage mess. That, in turn, has meant the county's swap agreements are not offsetting interest payments, pressuring finances even more. The county has 13 swaps covering a notional amount of $5.4 billion. Because of underlying rating downgrades on the sewer debt, Jefferson County was required by its swap agreements to post collateral or insurance. The county, which refused to do either, now is in technical default on its swaps.
The cascading failure of Jefferson County's sewer debt program has resulted in rating downgrades that have tainted some of the county's other credits.
Standard & Poor's now assigns a D to the Series 2003 B-2 through Series 2003 B-7 sewer warrants and a CCC rating on Series 2003B-1-A through 2003B-1-E and Series 2003C-1 through 2003C-10 sewer warrants. Moody's Investors Service currently rates Jefferson County's sewer warrants Caa3.
Both agencies lowered ratings on Jefferson County's other debt, but those ratings remain at investment-grade levels. However, both agencies have the debt under review for possible downgrades.
Analysts say their main concern is whether the county might file for bankruptcy protection and the uncertainly that might place on the use of revenues other than those coming from the sewer system.
County officials have said that the sewer system is an enterprise program and a bankruptcy would only affect sewer revenues.
However, a report by Moody's on March 27 said, "the county is the legal entity that issued both the sewer debt and the other obligations, and would therefore have to file as a county and not solely as the issuer of the sewer debt."
Most of the downgrades have come in response to disclosures made by the county concerning the financial crisis. One such recent disclosure was that the county entered into forbearance agreements which delayed a $53 million principal payment on April 1, while the county made an interest-only payment of approximately $4.2 million.
The forbearance agreements terminate on Tuesday, but Patrick Darby, a partner in the Birmingham office of Bradley Arant Rose & White LLP, said he anticipates the agreement will be extended to continue discussions on a proposed resolution of the crisis.
Darby, whose specialty is representing debtors and creditors in complex business reorganizations, including bankruptcies and out-of-court workouts and restructurings, was in New York on Monday discussing with bankers and insurers a proposal to use excess sales tax revenue now pledged to outstanding limited obligation school warrants toward the sewer debt. The county also wants to cap the amount of sewer revenues it pledges to the debt going forward.
"We have offered to try to get this extra sales tax revenue out of the Legislature in return for an agreement that we're not going to raise [sewer] rates," Darby said. "They are basically doing due diligence on the value of the proposal. We did not reach a deal but we agreed to keep on talking."
Although bond covenants state that the county will raise rates, Darby said the covenant is subject to a reasonableness standard, which means "rates have to be reasonable to the consumer."
"You can't just continue to raise utility rates without considering the effects on the user," he said.
Jefferson County's expensive sewer program, launched in 1997, was the result of a federal lawsuit to make it conform to Clean Water Act standards. Since then, sewer rates have increased 329%. County officials refinanced most of the debt several years ago, opting for a variable- and auction-rate portfolio and swap program to avoid rate increases.
Darby said the county's proposal would require legislative approval to redirect excess sales tax revenues, but it would provide a new source of revenue to help restructure the sewer debt. Bankers and insurers "have some honest, good faith questions about the value of what we put on the table," he said.
"The county is certainly trying to find a solution to all the financial problems of the sewer system," Darby said. "There is no present desire or intent to file Chapter 9." He added that the sewer system's debt problems do not pose any risk to the county's other debt.
Earlier in the week, there were published reports as well as a story aired on National Public Radio Tuesday that other members of the county's finance team were in Washington, D.C. in meetings with Treasury and local congressional representatives possibly discussing ways the county could avoid bankruptcy.
But sources said yesterday that no such meeting took place at the Treasury Department.
Jennifer Zuccarelli, Treasury's director of public affairs, confirmed yesterday that a Treasury official met with Jefferson County representatives on Capitol Hill before an unrelated hearing held by the House Financial Services Committee. The meeting was unscheduled, though, and no proposals were put forward by the Treasury officials, she said.
"Treasury had not planned any official meeting with the county and doesn't have any scheduled in the future," she added.
Darby said the county met with various officials in Washington, including Rep. Spencer Bachus, R-Ala., for purely informational purposes. "We did not ask for federal assistance," he said.
"It appears Jefferson County is working diligently to negotiate a settlement and avoid bankruptcy," Bachus said in a statement yesterday. "As recent events in the capital markets have shown, activities in these markets can move very rapidly, so it is prudent that appropriate federal officials be informed of the Jefferson County situation."
Andrew Ackerman contributed to this story.
