BRADENTON, Fla. — Jefferson County, Ala., commissioners last week sent a new settlement offer to creditors holding $3.14 billion of defaulted variable- and auction-rate sewer warrants.
No details about the offer were released, though the commission has scheduled a meeting Friday to take final action.
The commission last Thursday delayed, for a second time, making a decision on whether to settle or file for bankruptcy after meeting more than four hours in private with bankruptcy and county attorneys, as well as Alabama state finance director David Perry.
“The commission has reviewed the creditor’s offer in exhaustive detail, point by point,” Commission President David Carrington said after the closed-door meeting. “[Gov. Robert Bentley] has requested the commission enter into another standstill to get additional concessions from the creditors.”
The standstill agreement means that no action will be taken by the county to file for bankruptcy and the receiver for the county’s sewer system will not proceed with implementing a plan announced recently that included raising sewer rates by 25% annually over several years.
In mid-July, the county submitted a settlement proposal that asked creditors to take a $1.3 billion haircut while agreeing to sewer rate increases of 7.8% annually for three years then 3% hikes each year.
Creditors responded with a counteroffer agreeing to forgive $1 billion of the debt while seeking 8% rate increases each year for five years. Much of the debt is held by large banks and bond insurers. The county’s largest creditor is JPMorgan.
One Wall Street firm said the settlement could set a bad precedent.
“In our opinion, the creditors’ ostensible capitulation to Jefferson County’s demands for principal reduction sets a disquieting precedent,” Bank of America Merrill Lynch said in a report on Friday.
“In light of the county’s troubled execution of the capital program, not to mention a history of neglecting sewerage treatment and control dating back to the late 19th century, concessions made by the creditors in this instance could discourage investors from supporting both ongoing and prospective large-scale, multi-year capital programs intended to enable communities to comply with the Clean Water Act,” the report said.
Merrill Lynch also speculated that creditors may be willing to take such a large haircut for several reasons, including the fact that some investors picked up the county’s sewer debt at deeply discounted prices in the secondary market.
The lengthy time and expense of litigation in bankruptcy court could be another reason why creditors are willing to settle, the report said.
The additional concessions being sought by the county in last week’s counteroffer were not released.
“Negotiations are extremely fragile and confidential and the commissioners are not at liberty to discuss or disclose any details,” Carrington said.
The commission meets again in closed-door session at 9 a.m. Aug. 12 in Birmingham, the county seat.
A notice about the meeting covers a wide range of actions the board may take, including potential approval of a term sheet outlining a settlement with creditors as well as a timetable for its implementation and a forbearance agreement that would halt penalties associated with the variable- and auction-rate sewer warrants.
Commissioners could also decide to file the largest municipal bankruptcy in U.S. history, according to the meeting notice.
“In other words, a decision will be made,” Carrington said, indicating that commissioners may not be willing to continue settlement negotiations further.
There has been no public discussion about efforts to get local lawmakers to approve portions of a settlement requiring their attention.
It will take legislative action to create a public benefits corporation to take over the sewer system and issue refinancing debt, which reportedly is an element of settlement proposals made by both the county and its creditors.
No details have been released about how the county will deal with a financial crisis created by the loss of an occupational tax that was struck down by Alabama courts earlier this year because state lawmakers improperly enacted it.
The tax provided a significant source of revenue for the county’s general fund but lawmakers refused to provide a replacement tax or other financial relief during their regular session this year.
With revenues dwindling, the County Commission placed 500 workers on leave in mid-June.