BRADENTON, Fla. — Jefferson County, Ala., commissioners Monday narrowly adopted new sewer rates that underpin the resolution of the nation’s second-largest municipal bankruptcy.
The board voted 3-to-2 to increase the base sewage charge to $15 from $10. Commercial rates will go up 3.49% in November, and 7.89% each year for the next three years along with residential rates. After that rates will increase 3.49% each year, unless further adjustments are made.
While the county had already promised the rate increases to creditors holding $2.5 billion of the overleveraged sewer system’s $3.1 billion in debt, and in the county’s disclosure statement filed with the court in late July, commissioners were obliged by state law to hold a formal public hearing on the rates Monday.
Speakers asked commissioners to consider the impacts of higher rates on low-income residents and to keep rates lower by seeking additional concessions from JPMorgan, the county’s largest sewer system creditor.
If the commission had not voted to increase sewer system rates, it would not have bode well for the county’s aggressive plan to restructure the sewer system debt and exit Chapter 9 bankruptcy by the end of the year.
Creditors are currently voting on the plan and various negotiated settlements. Their ballots are due back Oct. 7.
Jefferson County expects that the court will set a date in December when the county will officially exit bankruptcy. At the same time, the county plans to go to the bond market to issue $1.8 billion of warrants, which are similar to bonds.
Proceeds of the warrants will be used to pay off most existing sewer system creditors at 65% and 80% on the dollar. Creditors that vote to retain insurance wrap on their sewer warrants will receive the lower cash recovery.
As the deal is currently structured, JPMorgan is taking the biggest loss and will get about 31 cents on the dollar, or $375 million of the $1.22 billion owed. The bank’s losses are fueling higher recoveries by other creditors.
However, if interest rates are higher than anticipated when the sewer system settlements were struck, Jefferson County may need to renegotiate the deals or seek higher concessions from JPMorgan.
If all goes as anticipated, the settlement with sewer system creditors will result in restructuring the debt and resolve more than five years of litigation surrounding the operation and financing of the sewer system, which was saddled largely with defaulted variable- and auction-rate securities.
Much of the litigation surrounded bribery and fraud that saw two dozen elected officials, contractors and others sent to jail. In 2009, JPMorgan settled securities fraud charges without admitting or denying guilt. The bank agreed to waive $657 in swap termination fees, and paid Jefferson County $75 million as part of a settlement with the Securities and Exchange Commission.
In addition to resolving the sewer system debt debacle, the county’s plan of adjustment also deals with more than $1 billion of other debt, including general obligation, lease, and school warrants. Creditors holding those warrants are expected to be made whole by receiving all principal payments.
Jefferson County, the state’s most populous county and home to Birmingham, filed for Chapter 9 protection in November 2011 citing $4.2 billion in debt.
It was the largest municipal government to file for bankruptcy in U.S. history until Detroit’s filing in July this year.
