Regional News

Jefferson County Residents Blame Sewer Creditors for Bankruptcy

BRADENTON, Fla. – For the first time in more than three years, bankrupt Jefferson County, Ala., is examining sewer rates.

In its first court-ordered report this week, the county laid out plans for reviewing rates that provide revenues to operate and maintain the sewer system. The process will span most of the remaining months of 2012.

Sewer revenues are pledged to pay back $3.14 billion of debt that the county borrowed to make system improvements mostly under a consent order for violations of the Clean Water Act. That debt is now in default and one of the major reasons why Jefferson County filed the country’s largest municipal bankruptcy in November.

The County Commission last week held the first in a series of public hearings on sewer system rates since a prior board in December 2008 suspended automatic rate increases (http://www.bondbuyer.com/issues/117_240/-297573-1.html) that had been promised to investors.

Though the outstanding sewer debt was not addressed by commissioners at last week’s hearing, some speakers blamed investors and creditors for the county’s problems today.

“When the original loan was made for our debt, our sewer debt, the debtors knew that we didn’t have the customer base to support the amount of money that they were lending us,” said Sandra Bracknell from Hueytown. “So therefore, they’re partly responsible for - for the mess we’re in because they lent us more money than they knew we could pay back, that the customer base didn’t support it.”

Bracknell went on to say that creditors should be “partly responsible, or maybe wholly responsible,” for the debt that drove the county into bankruptcy.

“So I think those things need to be considered before you raise the rate on us,” she told commissioners during the hearing.

Daphne Richardson of Birmingham said, “I think that a fraud has been perpetrated on the city of Birmingham and Jefferson County by the bankers, by the government. And I think that they should have assumed the costs.”

Richardson also said he had “nothing to do with the fraud. Why do I have to pay for it? I don’t think that’s right.”

Helen Rivas agreed with other speakers, and said she did not have a say about sewer revenues that may not have been used for court-mandated repairs of the system.

“But I guess because we voted for the people who did do that, we had to shoulder some of the responsibility,” she said.

Rivas went on to say that a “financial slight of hand” was committed that did not involve rate payers “and I think that those who understood very well what was going on, including the creditors, need to take responsibility for that.”

More than a dozen speakers spoke at last week’s hearing, and some said that they were already paying high sewer rates that made it difficult to pay bills.

David Denard, director of the county’s Environmental Services Department overseeing the sewer system, told speakers about the history of repairs and the cost to operate the system today.

It costs about $56 million a year to operate the sewer system, which includes personnel, utilities, legal and other expenses, he said.

While personnel costs are the biggest expense, Denard said legal fees are “significant” and have grown to $9 million a year from $1 million since 2008.

Denard did not specify what the legal costs entailed, but a written presentation he prepared for the hearing said that legal and other professional expenses “are expected to return near pre-2008 levels after resolution of the county’s bankruptcy case and any subsequent litigation.”

While the county has achieved many successes in rehabilitating the sewer system under the federal consent decree, Denard said much of the work done by the administration in the past was “unnecessary, poorly conceived, poorly managed, and performed with little regard for the total cost.”

One priority of the Environmental Services Department in participating in the rate-setting process, Denard said, is “establishing a level of public trust that has not been there for many, many years for understandable reasons.”

Rate payers need to know that they will receive value for what they pay, and that management is committed to controlling expenses and rebuilding trust, he concluded.

Commission president David Carrington said experts will be heard at the next public hearing on July 24, including Eric Rothstein, “who actually wrote the leading book on how to set wastewater utility rates.”

Rothstein is a principal and utility expert at Chicago-based Galardi Rothstein Group. His name first surfaced in court documents several months ago.

Carrington also said that other witnesses would be invited to provide testimony at upcoming hearings, including creditors of the sewer system.

While there currently is no proposal regarding sewer rates, Carrington said information gathered at the hearings would be considered when a rate proposal is developed.

The county also launched a special website to post presentations, documents and transcripts from the public hearings.

Comments also can be posted on the site at www.jeffcosewerhearings.org.

After July 24, the next tentatively scheduled public hearing is Aug. 21.

After that, the county has indicated that a rate proposal could be developed, and that additional hearings may be held in September and October, according to this week’s status report to the court.

Bankruptcy Judge Thomas Bennett ordered Jefferson County to file reports every 45 days on the sewer ratemaking process after Financial Guaranty Insurance Co. in late March complained that the county was not moving forward to implement new rates.

FGIC insures $1.6 billion of outstanding sewer warrants, and insures another $19.8 million though debt service reserve fund policies.

The insurer said it owns $101.4 million of sewer warrants acquired after the county defaulted on payments and has paid $3.3 million under its reserve fund policies.

Prior to the bankruptcy filing, sewer debt creditors persuaded a state court to appoint a receiver to oversee the sewer system, but Bennett removed the receiver Jan. 6, and returned control of the sewer syestem to the county.

At that time, Bennett said he would entertain future motions with regard to sewer revenues “should the county not take the necessary actions” to maintain the sewer system and address other actions, “including appropriate revenue enhancements be it by a rate increase or by some other manner.”

In upcoming matters in the county’s bankruptcy case, a court hearing will be held in Birmingham July 12 concerning the appointment of an unsecured creditors committee. The judge has already disqualified two of three committee members because the county has promised to pay their bills.

On July 25, the first court hearing will be held on a motion seeking to certify a class action (http://www.bondbuyer.com/news/jefferson-county-alabama-bankruptcy-general-obligation-bonds-1040527-1.html) in the bankruptcy case filed by more than a dozen Birmingham residents, including two City Council members and two Alabama lawmakers in early June.

The group filed a $1.63 billion claim in Jefferson County’s bankruptcy case seeking what they claim is the recovery of overcharges due to illegally issued sewer warrants and associated swaps.

The claim is based on a theory by Calvin Grigsby, president of broker-dealer firm Grigsby & Associates Inc.

Grigsby, who is also attorney for the group, believes that a large amount of the sewer warrants and related swaps are invalid because of constitutional violations and corruption.




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