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JeffCo Says Sewer Rates Can Be Adjusted for Debt

BRADENTON, Fla. — The new sewer rate structure recently approved by Jefferson County, Ala., commissioners is an interim plan that can be altered as creditors negotiate a settlement to restructure more than $3 billion of defaulted outstanding debt, according to a brief filed by the bankrupt county.

The county will make that point during a major a hearing Wednesday in Birmingham where creditors are asking federal judge Thomas Bennett for relief from the county's year-old Chapter 9 bankruptcy case so they can seek the reinstatement of a receiver to control the county's sewer system.

Creditors have indicated that the county designed a new sewer rate plan that would result in artificially low revenue increases as a "litigation strategy." The low rates would impair them, creditors have said in filings.

The new rates, adopted by the County Commission in November, go into effect in March and are expected to generate an overall 5.9% increase in revenues though that is not certain since they are based on a new structure, according to a document posted on a county website.

The document says the new structure will likely require future rate adjustment but does not indicate when that would be considered. It also said the "new rates provide a fair, reasonable rate structure" the county can use to toward an exit from bankruptcy. The website conflicts with a brief filed by the county's attorney for Wednesday's hearing.

The county's brief said the new "rate structure is anticipated to generate an annual increase of approximately $8.5 million in the net revenue stream on which the trustee holds a non-recourse lien."

The county also argues that the bankruptcy code shields commissioners from having to comply with the indenture for the sewer warrants, which requires that sewer rates be raised annually to support debt payments.

Bank of New York Mellon, trustee for the sewer warrants, said in its filing the bankruptcy code was not intended to be used in this manner.

BNY Mellon also said the county designed and implemented a process to adopt new rates "in a transparent attempt to imprint an appearance of formality onto what was nothing more than a litigation strategy designed to impair the value of the trustee's and warrant holders' collateral."

The trustee will proffer in court an alternate rate models that will result in an initial 22% increase in system revenues backed by "reasonable rates" that would generate sufficient funding to repay the debt and the costs of operating the system.

"The approved rate structure effects an interim revenue increase that does not dictate or foreclose future revenue modifications as may be appropriate, including in connection with a Chapter 9 plan," the county argued in its brief. "The approved rate structure is not and does not purport to be a multi-year schedule that will govern the treatment of sewer debt under a plan of adjustment or address the system's capital needs on a long term basis."

The county also said the new rate structure is an important step forward for the county and its creditors because it corrects structural flaws in the current system and provides a "new foundation" for revenue modifications "to address future debt service under a plan of adjustment and to fund the system's future operational and capital expenditures."

Jefferson County has not raised rates supporting debt and capital expenses of the sewer system in at least four years, and was warned by Bennett last year when he stripped the state-court appointed receiver from control of the sewer system that he might reconsider reinstating the receiver if the county did not begin to address sewer rates.

Bennett also recognized in previous rulings that the sewer system could not support all of the outstanding debt. However, he did rule that the bankruptcy code protected the "special revenue" pledge of the sewer warrants allowing creditors to get paid as the case proceeded.

Meanwhile, county commissioners David Carrington and Jimmie Stephens were in New York negotiating with certain creditors on Monday.

"The discussions were cordial, comprehensive, and substantive," the commissioners said in a joint statement Tuesday afternoon. "At the end of the meeting, the participants agreed that the meeting was beneficial and that additional conversations would be held in the very near future."

Due to the sensitive nature of the negotiations, the commissioners said they were unable to comment further.

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