BRADENTON, Fla. — A federal judge yesterday began a hearing to determine if a receiver should be appointed to control Jefferson County, Ala.’s financially distressed sewer system, which is saddled with nearly $3.2 billion of variable- and auction-rate debt and an estimated $748 million in swap termination fees.
Major insurers of the county’s sewer bonds, Syncora Guarantee Inc. and Financial Guaranty Insurance Co., and bondholders’ trustee Bank of New York Mellon sued the county last September and filed an emergency motion seeking a receiver for the sewer system, claiming Jefferson County officials failed to raise revenues appropriately to pay debt service.
In what seemed to be a partial victory for the county on Wednesday during a status conference with attorneys, U.S. District Judge David Proctor ruled that based on a law that prohibits federal courts from setting the rates on utilities controlled by state or local governments, if a receiver is appointed for Jefferson County’s sewer system he or she cannot set rates, according to reports of the courtroom proceedings in the Birmingham News.
Jefferson County attorneys had filed a motion seeking a delay in the receivership hearing, but Proctor allowed it to proceed yesterday.
The Birmingham News reported that a lawyer representing bond insurers charged in opening statements at yesterday’s hearing that ineptitude, poor planning and corruption were to blame for the sewer system’s problems. Lawyer Henry Simpson also said there have been several rate studies over the years that suggested the county should raise rates but those were ignored by county commissioners.
Wednesday’s ruling was seen as a boost to the county’s effort to maintain control over rates, which they have resisted increasing because a large portion of the sewer system’s ratepayers are considered low income.
And the ruling may help the county continue to work on restructuring the sewer debt without filing for bankruptcy to avoid receivership, said Jeffrey Cohen with Cohen & Associates PC, whose work includes municipal bankruptcy and creditors’ rights.
“If the court can’t order a receiver to set rates, then any receivership order the federal court could issue would only apply really to operations, and doesn’t give the bond insurers that moved for the receiver the kind of relief they were looking for,” he said.
Proctor on Wednesday also ordered both sides in the receivership case to submit names of potential receivers by next week, which may be an indication that he does not intend to immediately rule on whether to appoint a receiver following the hearing.
The county has also argued that efforts are under way to put into place a plan to restructure the debt, which is being facilitated by Alabama Gov. Bob Riley.
Riley, in a letter to Treasury Secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke earlier this month, said “federal support will be a necessary part of any solution” to the sewer debt crisis.
Riley asked Geithner and Bernanke to consider one of three avenues that would help Jefferson County restructure the debt: provide a guaranty to bondholders, a direct purchase by the governor of debt held by bondholders, or allow tax credits to pass through to the county under the Build America program.
The federal government’s help is needed, Riley said, because the rating downgrades of bond insurers “set off a chain reaction that has destroyed the market’s confidence in Jefferson County’s paper. As a result, the county was burdened with interest rates and accelerated principal payments that it simply cannot sustain.”
Riley pledged that Jefferson County would pay the restructured debt in full, and said it would be issued by a “bankruptcy-remote state funding facility.” He did not say if that funding facility currently exists, or if it would need to be authorized by the state Legislature.
The governor also pledged that once the debt was restructured, and the market regains confidence in the revenue streams supporting the debt, “Jefferson County is committed to refinancing the debt without federal assistance.”
Although a majority of county commissioners are believed to be against filing for what would be the largest municipal bankruptcy in U.S. history, no plan to restructure the debt has been publicly approved by them.
