BRADENTON, Fla. - Alabama Gov. Bob Riley has asked the newly created Troubled Asset Relief Program within the Treasury Department to provide a backstop for Jefferson County's sewer debt restructuring plan.
Riley called Jefferson County "a poster child for how the subprime mortgage crisis is hurting Main Street America" in a letter he sent Monday to Neel Kashkari, the interim assistant Treasury secretary who oversees the Troubled Asset Relief Program, or TARP, created as part of the Emergency Economic Stabilization Act of 2008.
Creditors of the Jefferson County sewer system have agreed to contribute $650 million in cash to support refinancing of the $3.2 billion sewer system debt, Riley said. The debt is in troubled auction- and variable-rate securities.
"Even with this contribution, a refinancing of the balance of the debt would require sewer rate increases well beyond the means of the local community," Riley wrote. "Jefferson County seeks a backstop of the balance of the refinanced debt (approximately $2.7 billion) from the guaranty program created by TARP."
The county has "no other revenue sources it can apply to the sewer debt," Riley told Kashkari.
However, Jefferson County officials have said they've been told that at least one proposed restructuring plan calls for the use of excess proceeds of a one-cent sales tax that now is dedicated to the repayment of $1.05 billion of school warrants sold in 2004 and 2005. Bond documents, however, state that "the county may use moneys in the redemption fund for other purposes if ordered to do so by a court of competent jurisdiction."
Riley has never spoken publicly about details of the restructuring plan since he stepped in to facilitate negotiations with Jefferson County's creditors in August. Portions of the plan have been published in the Birmingham News.
In his letter to Kashkari, the governor said net sewer revenues were sufficient to service the sewer debt before the current crisis but bond insurer downgrades triggered default in some of the county's debt.
"As a direct result of the subprime mortgage crisis, the county saw its debt service payments spike due to accelerated principal payments and penalty rates of interest," Riley said. "As a result, the sewer system's debt service essentially has doubled, and the county has paid out over $100 million above regular debt service this calendar year."
He said the county has raised its sewer rates over 300% in recent years and "cannot continue to call on its rate payers to shoulder the burden of Wall Street's financial meltdown." Riley said net revenues of the sewer system cannot service the existing debt load.
Although specific details are not revealed in the governor's letter, he did say the refinanced sewer debt would be secured by a gross pledge of sewer revenues and would provide estimated debt service coverage at 1.15 times debt service.
The new debt would have a final maturity of 50 years.
"The county will be obligated to set rates and collect charges sufficient to meet obligations on the bonds," Riley wrote. "Sewer rate increases are estimated at 2.85% a year. The Treasury's contingent obligation would be fully collateralized by the revenues of the sewer."
Riley called the proposal "a very efficient, cost-effective, and politically attractive way to promote the core purposes of TARP," and said it would provide relief to the sewer system's low- and moderate-income customer base.
He also said it would "address the incredible costs that have been inflicted on the county by insurer downgrades and illiquidity in the municipal bond market as a result of the subprime mortgage crisis."
Riley also approached New York Gov. David Patterson for assistance in negotiations, who brought the state's insurance superintendent, Eric Dinallo, into talks because his office regulates bond insurers based in the state.
Dinallo said yesterday that his office worked intensely for several weeks holding meetings with banks, insurers, and liquidity providers "hammering out this agreement which I think is a really fantastic opportunity for the county and for the bondholders."
Considerations by creditors include swap termination payments that will bring concessions to nearly $1 billion, Dinallo said.