BRADENTON, Fla. — Jefferson County, Ala., late Friday released its 2009 audit, with authors reiterating as they did earlier this year that the County Commission’s ability to continue as a going concern is in substantial doubt without restructuring the local government’s troubled debt.
The county is in default on $3.14 billion of variable- and auction-rate sewer warrants, $1.1 billion of limited obligation school warrants, and $105 million of general obligation warrants, according to the audit by Birmingham-based Warren, Averett, Kimbrough & Marino LLC.
Depfa Bank PLC claimed last year that the county was in default of its standby bond purchase agreement on $179.75 million of school warrants for failing to give Depfa priority in redemptions with excess sales-tax proceeds securing the warrants, the audit said.
U.S. Bank, trustee for the school warrants, said the county defaulted on the outstanding school warrants when it failed to provide required audits, and for failing to satisfy reserve-fund requirements, according to the audit.
The County Commission this week began public hearings on its 2012 budget attempting to make further cuts to account for a full year of less funding due largely to the loss of occupational and business taxes that were struck down by Alabama courts. That financial difficulty is also noted in the 2009 audit.
The 165-page document contains 127 pages of notes to the financial statements that cover the defaults and problems the county faces, including problems beyond the failed sewer warrants.
Under two pages of “uncertainties” labeled as Note X, auditors recount events that began in 2008 and those that continue today.
“Representatives of the commission and the state of Alabama are negotiating with creditors of the commission to restructure its outstanding obligations,” the auditors wrote. “The outcome of the negotiations is unknown at this time. However, if the negotiations are unsuccessful, a possible outcome would be for the commission to file for protection under Chapter 9 of the United States Bankruptcy Code.”
The auditors discuss five pending lawsuits over the defaulted sewer warrants. Those suits include a class action contending that Jefferson County’s sewer rates are unconstitutionally high and that the sewer warrants were invalidly issued.
The county was awarded $75 million late last year from JPMorgan’s settlement of securities fraud and related charges with the Securities and Exchange Commission — the county received $50 million directly from the firm and another $25 million through an SEC “fair fund” to assist those harmed by the underlying sewer warrant deals, the audit said.
JPMorgan worked on a majority of the sewer bond financings and was counterparty on most of the swaps. As part of its agreement with the SEC it also forfeited $647.8 million the firm said it was owed in swap termination fees.
Last November, auditors said, the Bank of New York Mellon — as trustee for the sewer warrants — filed with the County Commission a claim to the $50 million paid by JPMorgan.
The bank’s claim is “alleged to be based, at least in part, on events that took place before Sept. 30, 2009,” the audit said, proving no other detail about the bank’s claim.
Prior to the audit’s release, it was publicly known that the court-appointed receiver for Jefferson County’s sewer system, John Young, had filed a claim for the entire $75 million from JPMorgan’s settlement with the SEC to create an assistance program for low-income residents subjected to rate increases.
Young has since agreed to delay seeking the funds while the commission continues settlement talks with creditors.
In related developments, according to the 2009 audit, Syncora Guarantee Inc. filed a notice of claim with the county stating that it may seek reimbursement of $32.72 million paid by the insurer under a debt-service reserve fund policy in late 2008.
Auditors said that claim “is alleged to be based, at least in part, on events that took place before Sept. 30, 2009.”
Assured Guaranty Municipal Corp. last December demanded reimbursement of $5.03 million for draws on insurance policies relating to the sewer warrants.
“Payments made on behalf of the commission are accrued and reported as liabilities in [the] financial statements,” the auditors said. “The recourse for this payment is limited to sewer revenue.”