BRADENTON, Fla. — Jefferson County, Ala., commissioners met Tuesday behind closed doors with attorneys discussing whether to finalize a pending settlement with creditors or to file bankruptcy.

The meeting was adjourned just after 6 pm and was set to resume at 2 pm Wednesday EST. 

Board members were reportedly briefed on issues that have arisen since a settlement term sheet was approved in mid-September with creditors holding $3.14 billion of troubled sewer warrants, most of which is in variable- and auction-rate mode.

The term sheet called for restructuring the outstanding sewer warrants with creditors agreeing to take a haircut of $1.09 billion in return for refinancing $2.05 billion of sewer warrants into 40-year debt. The deal also relied on the Alabama Legislature creating a special district to take over the sewer system and providing a moral obligation for repayment of about $1 billion. So far, no legislative action has occurred.

Commission president David Carrington on Monday announced that the value of concessions had dropped by $140 million for a number of reasons, including inability to obtain agreement from some small creditors and loss of a $69 million concession for the forgiveness of swap termination payments by Lehman Brothers. Lehman filed for bankruptcy in September 2008, and the case is still pending.

Concern about the reduction in concessions was one reason for Tuesday’s marathon commission meeting.

Board members also said they were frustrated that legislators have not decided if they will help the financially strapped county.

Meanwhile, the county is now in default of all outstanding sewer warrants, according to the 2010 audit released on Tuesday.

Due to current defaults and potential cross-defaults, as well as the county’s inability to pay accelerated debt-service obligations, the sewer warrants are now classified as current liabilities, according to Birmingham-based Warren, Averett, Kimbrough & Marino LLC.

In addition, Jefferson County continues to have exposure to litigation that resulted in courts striking down its business license and occupational taxes. The occupational taxes provided a major source of revenue for the general fund, and the loss has positioned the county closer to a Chapter 9 filing because lawmakers have refused to provide a replacement.

Auditors said as a result of the occupational tax litigation, the court could order the county to refund more than $90 million in taxes collected before Dec. 1 last year.

“These conditions raise substantial doubt about the commission’s ability to continue as a going concern without the restructuring of debt or other significant reorganization activities,” the audit said.

Similar warnings were made in the county’s 2008 and 2009 audits, which were released earlier this year. However, the potential $90 million exposure for tax refunds is a new contingency in the 2010 audit.

In addition to the defaults and occupational tax repayment exposure, the county has also received a claim for the reimbursement of $32.7 million paid by Syncora Guarantee Inc. under a debt-service reserve policy. Assured Guaranty Municipal Corp. has demanded reimbursement of $4.4 million for draws on its insurance policies, according to the the latest audit.

The county had $845.1 million of limited-obligation school warrants outstanding as of Sept. 30, 2010, which are in default because the reserve fund has not been replenished as required by the indenture. In addition, $179.75 million of the school warrants are variable-rate demand obligations held by the liquidity provider, which has also issued a notice of default saying the county has failed to follow redemption procedures.

Another $118.74 million of general-obligation, variable-rate refunding warrants unrelated to the sewer or school debt are also in default because the county has failed to make accelerated payments required by liquidity providers.

As of Sept. 30, 2010, Jefferson County had $4.3 billion of outstanding debt. Of that, more than $4 billion is in default, far eclipsing the prior default record held by the Washington Public Power Supply System in the 1980s.

The so-called Whoops debacle involved public power utilities that defaulted on $2.25 billion of municipal bonds after they refused to pay their contracts to finance two new nuclear plants. Their refusal to pay the contracts was upheld by the courts.

If Jefferson County files for Chapter 9, it would be the largest municipal bankruptcy filing in U.S. history.

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