BRADENTON, Fla. Jefferson County, Ala., is nearing the end of the nation’s second-biggest municipal bankruptcy case as it prepares to close on the sale of $1.7 billion of new sewer warrants on Tuesday.
Proceeds will pay off prior sewer system creditors holding $3.2 billion in defaulted warrants, which will be retired.
Once that occurs, the Chapter 9 plan of adjustment will be implemented, according to a market notice, ending a two-year process that cost the county $25 million in fees to lawyers and other advisors.
While several days remain on a 14-day appeal period that began once the court confirmed the plan on Nov. 22, closing on the warrants will moot any appeals, said Jefferson County Commission President David Carrington, who added that he would not celebrate until after closing on the sewer warrants is completed.
“A lot of people felt like the deal was not going to be done,” he said. “It’s a testament to the resilience of this commission that we’re anticipating exiting bankruptcy Tuesday.”
When Jefferson County filed for Chapter 9 reorganization in November 2011, attorneys projected that the complex case, at the time the largest municipal bankruptcy in the country with $4.1 billion in debt, could take three or four years and cost around $25 million to adjudicate. It has involved more than 75 attorneys who filed more than 2,000 briefs with the court.
The county case has since been eclipsed by Detroit, which filed for Chapter 9 in July with an estimated $18 billion of debt.
“I feel like we cut the timeframe [on the Chapter 9 case] significantly and we’re on target with what we thought it would cost,” Carrington said. “I hear Detroit has already spent more than we have.”
In exiting bankruptcy, Jefferson County closes a chapter that began with the first default in 2008 and begins a new chapter as the county resumes paying its debt, Moody’s Investors Service said in a special comment last week.
The plan of adjustment “will test the county’s ability to manage its own operations and pay debt without the protection of bankruptcy proceedings,” said Moody’s analyst Christopher Coviello. “In particular, county will need to implement sewer rate increases over the next 40 years, address sizeable unfunded sewer capital needs, and comply with a new debt service schedule that starts out moderate but spikes sharply upward in 11 years.”
With the sale of new warrants and better capital planning for the sewer system, which has been under a federal consent decree for decades, the county’s adjustment plan funds capital expenses for the first 10 years. After that a shortfall of $1.2 billion for capital needs was projected.
Carrington said that the sale of new sewer warrants enabled the county to decrease the capital expense deficit by $60 million.
He also pointed out that most utilities plan for capital expenditures over a three- to five-year timeframe, and said Jefferson County’s consultants conservatively projected revenues, which gives the county an opportunity to lower expenses while expanding the sewer system as new economic development prospects occur.
“The [new] debt is all callable in 10 years and that makes it all refundable,” he said, adding that the county already paid higher interest costs as a penalty for exiting bankruptcy.
By the time the 2013 sewer warrants can be refunded, the county stands to lower borrowing costs, he said.
To accomplish that the county must focus on restoring its financial credit in the market, and shed the “dark cloud of bankruptcy caused by past actions of county commissioners,” he said, referring to previous commissioners and others who went to jail for corruption that enveloped the sewer system over the past decade.
For starters, Jefferson County must implement its new financial plan for the future, and publish audits on time, Carrington said, noting that he hopes to be around to assist with that.
He is in the third year of his first four-year term in office, and has announced that he will run for reelection next year.
“We’re well positioned to grow so what we do now is take all of our energy getting our financial house in order and refocus on economic growth and job creation,” he said. “I’m pretty optimistic now that this cloud is lifted, and excited about our future.”
