Regional News

Jefferson County, Ala., Hearing on Bankruptcy Exit Plan is May 9

BRADENTON, Fla. – Predictions by market observers that the nation’s largest municipal bankruptcy would be complex, challenging, and costly are playing out in Jefferson County, Ala.

The federal judge overseeing the case agreed Friday with the county’s request to hold a hearing May 9 to discuss the schedule for filing a plan of adjustment, which will detail how the county plans to adjust its debts in order to exit bankruptcy. The county has asked the judge not to set a hard deadline for filing the plan.

In apparent effort to show that headway is being made in the case, the county’s attorneys late last Thursday listed a litany of accomplishments and struggles since Jefferson County filed for bankruptcy on Nov. 9, 2011 with $4.2 billion of outstanding debt mostly related to $3.1 billion of failed variable- and auction-rate sewer warrants.

County commissioners have continued to right-size the county without financial assistance from the Legislature, and defended themselves against “relentless litigation brought by the holders of the county’s sewer debt” and other legal matters, according to court documents.

Though legal costs were not mentioned, commissioners were told recently that they are on track to pay $25 million for legal expenses this year.

The primary factors that caused the county’s insolvency were the Alabama Legislature’s repeal of an occupational tax that provided almost 40% of the county’s unrestricted general fund revenue, and “the failure of the highly flawed financing structure for the county’s sewer debt,” the court filing said.

Despite the fact that lawmakers have refused to authorize replacement revenue for the county, commissioners said they have “aggressively” restructured operations and financial affairs, and “successfully defended its eligibility for Chapter 9 against challenges from numerous creditors.”

Other endeavors included “actively” engaging the Legislature in an attempt to restore revenue for the general fund, aggressive cost-cutting such as laying off more than 500 workers and selling non-essential assets, rejecting leases for three satellite courthouses, and modifying a fourth courthouse lease so that it does not impair bondholders.

“The commission’s efforts have been complicated and made slower and more difficult by constant litigation from the sewer creditors and other groups,” the county said in a footnote.

While defending the bankruptcy case, numerous legal challenges and appeals, the county said it also implemented a new sewer rate structure “that increases revenues and places the sewer system on a sounder financial footing,” the filing said.

Though the county had not raised rates in at least four years, officials believe the new, untried rate structure will generate 5.9% more revenue. It, too, resulted in several new legal challenges by creditors who believe the revenue will be insufficient to pay the debt.

In the year and five months since filing for bankruptcy, the county said it continues to respond to an Internal Revenue Service audit over the sewer debt, and that it has produced over 170,000 pages of documents requested by creditors and litigants.

The county asked for the hearing May 9 because officials will be tied up with creditor meetings the weeks of April 8 and April 15, and mediation the week of April 22 concerning appeals pending before the 11th Circuit Court of Appeals in Atlanta.

Among the legal challenges facing the county are lawsuits by separate ratepayers attacking the legality of the sewer rates and debt.

On Friday, attorney Calvin Grigsby, president of the broker-dealer firm Grigsby & Associates Inc., filed a second amended complaint on behalf of a group of local elected officials and residents in Birmingham. The brokerage firm is inactive, according to the Financial Industry Regulatory Authority. However, it is registered as a municipal financial advisor with the Municipal Securities Rulemaking Board.

The 44-page document argues, again, that the sewer refunding warrants issued in 2002 and 2003, and associated swaps, are invalid and unconstitutional because the county failed to have voters approve the deals, and that they were “tainted by fraud, collusion, corruption, bribery, and other criminal conduct.”

The four-count complaint contends that the county’s sewer ratepayers face the overwhelming prospect of paying $1.6 billion in overcharges related to the unlawful sewer debt with more than 20 years of “confiscatory sewer fees.” The plaintiffs asked for the sewer warrants to be invalidated, for the court to prohibit any sewer rate increases attributable to the invalid debt, and for attorney’s fees to be paid from net revenues recovered by the county as a result of voiding the warrants. Grigsby, who is working on contingency, could not be reached for comment.

The original case was filed last June seeking class-action status to include all sewer ratepayers. Since then, Bennett has ordered the complaint to be revised twice largely seeking clearer language about the claims being made.

Bennett has also refused to certify a class, and struck five of the original nine counts cited in the suit, including one pertaining to Haskell Slaughter Young & Rediker LLC, bond counsel for the sewer warrant bond sales.

Bank of America NA and Societe Generale have been dismissed from the case because they have sold their sewer warrants to third parties.

Bennett has said that if the complaint filed Friday does not pass muster, he will not allow it to be revised and filed again.




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