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Legislative Deadline Approaches For Granting Fiscal Relief to Jefferson County

BRADENTON, Fla. — Few days remain in the Alabama Legislature’s annual session and lawmakers continue to argue over whether to provide bankrupt Jefferson County fiscal relief.

While a majority of the county’s legislative delegation hasn’t agreed on a bill, two lawmakers are attempting to bypass the delegation and have filed general bills that could be heard by the full Legislature. About a week of legislative meeting days remain.

Jefferson County filed for bankruptcy in November after failing to restructure $3.14 billion of defaulted sewer warrants and losing an occupational tax that provided a significant source of revenue for its general fund.

The job tax was authorized on two occasions by the Legislature, but both were struck down by courts as unconstitutional.

The county cannot impose the tax, or other kinds of taxes and fees, without approval from state lawmakers.

In recent years, members of the county’s local legislative delegation have filed local bills that would have provided fiscal relief to the county.

The bills ultimately died due to lack of majority support within the delegation, which has failed to agree on a bill in the current session as well.

Traditionally, the Alabama Legislature only allows local delegations to vote on matters affecting their jurisdiction, and not the entire Legislature.

This year, for the first time, two nearly identical general bills have been proposed in the House and Senate that could bring the fiscal relief measures in front of both chambers.

The bills have been proposed by Rep. Jack Williams and Sen. Jabo Waggoner, both Republicans from Vestavia Hills, a double-A rated city of 34,000 residents in Jefferson County.

Williams’ HB 745 and Waggoner’s SB 567 would enact the Alabama Financially Distressed Counties Act, although it currently would only apply to Jefferson County.

The legislation would allow any county that has filed a Chapter 9 bankruptcy petition to levy a 1% sales tax, a 3% rental and leasing tax, a 0.5% privilege license tax on business activity, or a motor-fuel excise tax up to 10 cents per gallon.

The taxes could not exceed 20% of the largest annual amount of total general fund expenses in the five years before the fiscal year in which the county filed for bankruptcy, according to the bills.

Both measures could emerge from committee this week, and are being closely followed by the Association of County Commissions of Alabama.

The ACCA has provided “assistance and support” for both bills, and with only a few days remaining in this year’s session, their passage “will require the support of county officials from throughout the state,” the association’s website said.

Meanwhile, Jefferson County’s bankruptcy case is growing more complex as $1 million in monthly legal fees eat into the general fund, and the county prepares to lay off more employees to deal with a looming deficit.

Four adversarial proceedings are now pending, to which the county must devote resources in addition to its main bankruptcy case.

Two adversarial disputes are being pressed by Bank of New York Mellon, trustee for Jefferson County’s sewer warrants.

The bank filed its first proceeding in February, alleging that Jefferson County misused sewer system revenues that otherwise would go to pay debt service.

A ruling as to how much the county can use sewer revenue to pay for operations versus payment of debt is pending before federal bankruptcy Judge Thomas Bennett.

Last week, Bennett allowed Wells Fargo to submit a friend-of-the court brief as trustee for $105.13 million of the county’s defaulted 2001B variable-rate general obligation warrants.

The variable-rate GO warrants are held by JPMorgan and Bayerische Landesbank, which provided standby warrant purchase agreements. When the county failed to make accelerated payments under terms of the standby warrant purchase agreements, the banks exercised their rights under events of default and demanded full payment of the principal and interest.

Wells Fargo said in its court filing that it has a substantial interest in the outcome of the adversarial proceeding with regard to the use of sewer system revenues, particularly if the Alabama Legislature takes no action to increase the county’s revenues.

The bank also said that sewer system creditors want disallowed expenses to be paid from sources other than sewer revenues, including the general fund. Other creditors, such as those holding unsecured GO warrants, depend on the general fund for payments.

If the court grants relief requested by sewer creditors, they “will receive the functional equivalent of a recourse claim against the county, and the general unsecured creditors will be forced to subsidize the system for the benefit of the sewer creditors,” Wells Fargo said. “This is not what any of the parties bargained for under state law, nor is it permitted under” the bankruptcy code.

Bennett has not indicated when he will rule on the use of the sewer system revenues.

Last week, the judge also severed several counts in BNY Mellon’s adversarial proceeding, and placed them into a second proceeding.

The sewer warrant trustee claims there are constitutional issues associated with the use of sewer revenues for non-operating expenses such as capital expenditures, fees and expenses for professionals unrelated to the operation and administration of the system, depreciation and amortization, and estimated funds to cover future capital needs and professional expenses.

The county’s withholding of revenues for those kinds of unauthorized expenses “harms the trustee, the sewer warrant holders, including the liquidity banks, and the insurers, and is an unlawful taking under the Fifth and 14th amendments to the U.S. Constitution,” BNY Mellon said.

Among other allegations, the bank said the county withheld $1.6 million from December and January sewer system revenues to pay expenses, including those related to the county’s Chapter 9 bankruptcy case.

In addition to the adversarial proceedings, nine separate appeals have been filed with the 11th Circuit Court of Appeals by sewer system creditors challenging Bennett’s ruling earlier this year that stripped the state court-appointed receiver’s power to run the county’s sewer system.

“The appeal regarding the status of the state court-appointed receiver is an important appeal because this type of covenant permitting the bondholders to appoint a receiver is very common in bond financings,” one market observer said. “The appeal will make new law and the marketplace will be very interested in the result.”

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