BRADENTON, Fla. — The Jefferson County, Ala., Commission Friday avoided filing the largest municipal bankruptcy in U.S. history by agreeing to a restructuring deal with creditors holding about $3.11 billion of defaulted variable- and auction-rate sewer warrants.
Bankruptcy still is a possibility, however, if the deal falls through or if the county cannot overcome the loss of a major source of income supporting the general fund.
Commissioners voted four to one to accept a term sheet that includes concessions of $1.09 billion from creditors in return for refinancing about $2.05 billion of sewer warrants into 40-year debt with a moral obligation pledge from Alabama.
The deal requires three annual sewer rate increases of 8.2% starting this November, and 3.25% each year starting in 2014.
JPMorgan, the largest creditor of the sewer system, is taking about $750 million of the haircut.
“We are encouraged by the county’s decision to refinance the sewer debt and look forward to working toward a successful resolution in the coming months,” the investment bank said in a statement.
Commissioner George Bowman, the lone dissenter, said he could not vote to raise sewer rates. People in Bowman’s district are some of the poorest in the county.
“This has been a tough decision,” said Commissioner Joe Knight, who described the process as agonizing. “It’s been going on for three and a half years. It’s time for a resolution of this lingering debacle. There’s enough blame to go around.”
Key provisions of the deal also include refinancing of the debt by a newly formed public corporation, up to $1 billion of bond insurance provided by Assured Guaranty Corp. at the county’s option, issuance costs to be paid by the county or the corporation, and closing on the sale of new warrants no later than June 30, 2012.
Both sides have agreed to stay all pending civil litigation until the refinancing closes, and after that, all litigation will be dismissed, according to the term sheet.
The county will create and fund a low-income assistance program and negotiate a closing agreement with the Internal Revenue Service for the existing sewer warrants and the proposed refinancing bonds with no “taxes, costs, or other liabilities” to existing warrant holders.
The IRS already is examining $2.2 billion of outstanding sewer warrants sold in 2003.
The county also will complete the 2010 audit by Oct. 31 and the 2011 audit by Jan. 31.
In addition to haircuts, outstanding interest-rate swaps will be terminated at no cost to the county.
At last report, the banks and fees they sought for swap terminations are Lehman Brothers Special Financing Inc. at $59.1 million, Bank of America NA at $31.1 million, and Bear, Stearns Capital Markets Inc. at $9.06 million.
JPMorgan will also waive $9 million in interest claims and termination fees of a swap associated with $120 million of Series 2001B general obligation warrants unrelated to the sewer debt.
Until the refinancing closes, the sewer system will remain under the control of the court-appointed receiver, John Young.
“I said all along a negotiated settlement certainly was in the best interest of the county and the customers of the sewer system,” he said following Friday’s decision by the commission. “We now have very predictable, stable, and reasonable rates to insure the continued quality operation of the system and enough money in the capital plan to do what we need to do.”
Young posted the term sheet approved by the County Commission and related documents on his website,
The county and creditors will use the term sheet to create a detailed, definitive agreement.
Gov. Robert Bentley Friday reiterated a promise to call a special session of the Legislature and to seek support for creating the corporation that will issue the new debt as well as the moral obligation covenant by the state to replenish draws, if any, on the debt service reserve.
The moral obligation pledge is expected to reduce interest costs on the new debt by 150 to 170 basis points.
Legislators also will be asked to require mandatory sewer hookups for new construction and to provide other assistance to the county to resolve its general fund deficiency. Bentley has not said what he will propose that will enable the county to raise revenue.
“Jefferson County now has a framework in place to solve a longstanding local issue that has a significant statewide impact,” Bentley said. “I look forward to continuing to work with county commissioners and legislators in preparation for a special session of the Alabama Legislature so that we can pass laws necessary to move forward with the settlement and to address the county’s general fund budget issues.”
