BRADENTON, Fla. — Jefferson County, Ala., said Friday that it has received letters from the Internal Revenue Service, which wants to examine $2.3 billion of sewer warrants issued in 2003.
The letters, dated May 2, stated that the IRS had selected the Series 2003B and the 2003C warrants “for examination to determine compliance with federal tax requirements,” according to a notice filed by Digital Assurance Certification LLC.
Some or all of the $2.3 billion of warrants are outstanding, including $95.8 million of fixed-rate warrants. The remaining warrants are either in variable-rate demand or auction-rate mode, and the county has defaulted on them. Most of the debt is owned by banks and insurers.
The IRS requested that the county provide certain documents relating to the warrants. The county’s disclosure notice did not specify what kinds of documents were sought.
“The county is in the process of providing the information requested by the IRS and will cooperate with the IRS in the course of its examination,” the notice said.
“If the IRS determines that federal tax laws or regulations applicable to the Series 2003B warrants or the Series 2003C warrants have been violated, interest on the said warrants could be declared taxable and a tax liability could be assessed against the holders of all or some portion of the said warrants,” the disclosure notice said.
Commissioner Jimmie Stephens, head of the County Commission’s finance committee, said he could not comment on the IRS examination.
Stephens referred questions to the county attorney, Jeff Sewell, who could not be reached.
The IRS inquiry adds to a long list of problems confronting Jefferson County. Most recently two court rulings struck down business and occupational licenses that provided $77 million for the general fund.
Several bills that would provide some relief to the county are now pending before the Alabama Legislature, but time is running short and the session ends Thursday.
In addition, at least one senator in the county’s legislative delegation has contested the bill that would provide the most relief by giving the county limited home-rule power to adjust spending and increase some taxes.
The protest that has been filed could kill the measure if the senator does not lift his objection before session ends.
The loss of the funding from the licenses has the potential to render Jefferson County insolvent, which could ultimately force it to file for bankruptcy.
The county has been negotiating with creditors for years over ways to restructure $3.2 billion of variable- and auction-rate sewer refunding warrants issued in 2002 and 2003 that failed in the wake of the market collapse in 2008.
The collapse caused penalty interest rates to kick in, and accelerated payments, which raised the cost of the debt well above what sewer system revenues can support. The county has had junk ratings for several years.
The non-recourse warrants are secured solely by sewer system revenues.
A court-appointed receiver for the sewer system is expected to submit a report soon outlining various ways to improve revenues, including rate increases. In addition to the sewer warrants, the county has $120 million of troubled variable-rate general obligation warrants.
Meanwhile, the county is embroiled in a number of lawsuits, including one it filed against JPMorgan and various individuals involved in the sewer deals.
The county is named in at least one suit filed by a bond insurer, and several others filed by local individuals over the sewer warrants.
