In Alabama and Jefferson County, The Bad-News Saga Just Stretches On

BRADENTON, Fla. - Alabama enters 2009 still under the cloud created by Jefferson County's lingering sewer debt crisis. A lot is riding on what happens in the first half of the year.

The county's sewer system is $3.2 billion in debt, most of which is in variable- and auction-rate mode, and the debt is covered by out-of-kilter swaps. The situation threatens to push the state's largest county, whose seat is Birmingham, into what would be the country's largest ever municipal bankruptcy.

The calendar of main events kicks off Jan. 26 when a hearing is scheduled in federal court where the county's main sewer bond insurers, Financial Guaranty Insurance Co. and Syncora Guarantee Inc., along with bond trustee Bank of New York Mellon, are pursuing the appointment of a receiver.

Much of Jefferson County's future, though, is in the hands of state lawmakers. Their annual legislative session starts Feb. 3 and the county needs laws changed so that some restricted local funds can be redirected to support restructuring of the sewer debt.

Meanwhile, civil and criminal cases related to Jefferson County's sewer bond program are expected to proceed this year against Birmingham Mayor Larry Langford, who is a former Jefferson County commissioner, as well as Alabama bond dealer William Blount, and their friend, lobbyist Albert LaPierre.

The Securities and Exchange Commission's civil case alleging securities fraud charges against Langford, LaPierre, and Blount and his firm Blount Parrish & Co. has its first hearing Jan. 30.

It is the SEC's first enforcement action involving security-based swap agreements, in this case the swaps Jefferson County entered into that were based on municipal bond indexes. Attorneys for Langford, Blount, and LaPierre will argue Jan. 30 for dismissal of the case on the grounds that the SEC has no jurisdiction over security-based swap agreements.

In a separate case, the three men are scheduled to stand trial May 4 in U.S. District Court in Alabama. Together they a 101-count indictment in which charges include conspiracy, bribery, fraud, money laundering, and filing false tax returns in connection with an alleged long-running pay-to-play bribery scheme related to bond deals and other financial transactions in Jefferson County.

The state itself also will be the focus of attention in court this year.

Alabama in late October filed a complaint in federal court asking a judge to void a swaption the Alabama Public School and College Authority entered into with JPMorgan, which is one of Jefferson County's main creditors. No hearings have been scheduled in the state's case yet.

However, JPMorgan in mid-November filed a motion seeking to have the case dismissed, saying Alabama's suit "is a baseless attempt by a public authority to escape its clear contractual commitments."

While financial negotiations continue and legal cases move forward, the economic recession is taking its toll in Alabama, just like the rest of the nation.

The added challenge of dealing with financial issues related to Jefferson County's sewer system and the state's swap case may take its toll on Alabama's credibility, said Andreas Rauterkus, assistant professor of finance at the University of Alabama in Birmingham.

"I think the problem that the state and Jefferson County is going to have is that, if you look at the academic studies, reputation is incredibly important in the financial markets," Rauterkus said.

With continuing volatility in the credit markets, Rauterkus said Alabama issuers can probably raise money but it may cost a premium as attention continues to be focused on how the financial problems are handled.

"They have not shown themselves as somebody willing to negotiate or willing to compromise," Rauterkus said. "With really tight credit markets, that puts Alabama in a bad position."

At the annual legislative session next month, Jefferson County hopes to get help solving one issue that is stalling the sewer restructuring plan. Lawmakers are expected to be asked to allow the county to redirect excess proceeds from a local sales tax to the refinancing of the troubled sewer bonds.

They will have little time to act unless the county's creditors agree to yet another extension of sewer debt and swap forbearance agreements. The current forbearance agreements expire Feb. 20.

Gov. Bob Riley continues to facilitate debt restructuring negotiations for the county but has been unsuccessful in obtaining a backstop or guarantee from the outgoing Bush administration that would make it easier to market bonds refinancing the existing troubled debt. Riley, a Republican, has requested the relief twice.

In a recent interview, county commissioner Shelia Smoot said the county plans once again to ask for relief from the federal government after President-elect Barack Obama is inaugurated on Jan. 20 and his administration is in place.

Smoot, who opposes bankruptcy, said the county wants to pay its debt - at reasonable rates.

"We're not asking for cash like everyone else is asking for," said Smoot, a Democrat. "We're asking for [the federal government] to back our debt. And someone ought to understand we need relief, not cash."

If a federal judge agrees to appoint a receiver for the sewer system, it's not clear how that might impact debt restructuring plans.

"I would think that receivership is coming for the sewer system because it's not working the way it is," Rauterkus said. "The easiest way to deal with this is to put a credible third party in charge who can make the changes necessary to make it a viable business. If that happens it might restore some credibility in the market."

U.S. District Court Judge R. David Proctor is scheduled to resume a hearing Jan. 26 on whether to appoint a receiver. Proctor's deliberations will include consideration of a report evaluating the sewer system that is due Jan. 19 from two special masters - John Young, president of American Water Services Co., and John Ames, an attorney with Greenbaum Doll & McDonald PLLC.

Once the issue of a receiver is decided, Proctor is expected to move on considering counterclaims that Jefferson County has filed against FGIC and Syncora.

The county is seeking a jury trial and more than $100 million in damages. It claims the insurers' negligence resulted in their rating downgrades, that they breached their contracts with the county by failing to provide investment-grade insurance, and that they committed fraud by failing to disclose risks associated with their investment portfolios and residential mortgage-backed securities.

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