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Ad Hoc Creditors Group Seeks Relief from JeffCo's New Sewer Rate Structure

BRADENTON, Fla. - An “ad hoc” group holding $676 million of Jefferson County, Ala.’s sewer warrants says the bankrupt county has failed to propose reasonable sewer rate increases that protect their holdings.

The group says the County Commission’s recent proposed rate increase designed to bring in 5.9% in new revenues is “so complicated and untested that the county does not know how much more revenue will be generated, if any.”

“By the county’s own admission, the new rates’ complexity guarantees more delay in formulating a plan” of adjustment for exiting bankruptcy, the group said in a court filing Friday.

The group asked bankruptcy court Judge Thomas Bennett to hold an expedited hearing to consider allowing them to pursue “reasonable sewer rate and revenue increases” by lifting the automatic stay that currently prevents them from taking such action.

The ad hoc group consists of 16 creditors, most of whom are funds or investment advisors for account holders, according to court documents.

Of the $676 million of sewer warrants they hold, about $495.6 million are auction-rate securities unable to be sold since the bond market began to freeze and liquidity dried up in late 2007 and early 2008. Some of the debt may have been purchased from other creditors.

Hearings for similar relief sought by Bank of New York Mellon, trustee for the sewer warrants, and bond insurer Financial Guaranty Insurance Co., are scheduled Thursday.

Last week, county commissioners approved new sewer rates under a structure that they believe will generate 5.9% more revenue for the system, though the new rate system is untested, they said.

The new rates, in which most residential customers will pay less than $2 more per month, are scheduled to go into effect next March.

The new rate structure is designed to incorporate losses due to corruption and asset values that are pegged at far less than the outstanding $3.14 billion of sewer debt.

BNY Mellon said the new rate structure is based on a “novel” approach using inapplicable investor-owned and regulated utility rate-setting concepts that allocate risks of loss to the utility’s equity investors.

“The warrant holders, however, are secured creditors, not equity holders,” the trustee said, adding that the sewer system is a government-owned utility that “has no equity holders to pay for the costs of its own mismanagement.”

Alabama’s attorney general, Luther Strange, agreed that the county’s complex formula, ostensibly based on various state laws, should factor in corruption and reduced book values since the sewer system was overbuilt by the county in some areas.

Strange, however, said he does not support increasing revenues by 5.9% at this time because the new rate structure is “based on substantially incomplete data.”

The ad hoc sewer warrant group, which participated in public hearings the commission held in advance of adopting the new rate system, argued in court papers that the sewer debt could be refinanced at the historically low interest rates now available in the bond market.

The refinancing would be based in part on concessions that creditors offered last year in negotiations with the county, the ad hoc group said, though the plan would not require action by the Alabama Legislature.

County commissioners ultimately rejected a settlement with creditors, which contained more than $1 billion in concessions, and filed the nation’s largest municipal bankruptcy a year ago.

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