BRADENTON, Fla. — Jefferson County, Ala., commissioners may decide Friday whether to file for bankruptcy if creditors holding $3.14 billion of troubled sewer debt do not agree to accept the county’s final offer to restructure the debt.
Terms outlining the county’s latest settlement offer were published in the Birmingham News Wednesday, though two commissioners would not confirm those details.
The county has asked creditors to take a haircut of $1.17 billion and provide $19 million of a $20 million indigent reserve fund to assist low-income sewer ratepayers, according to the paper.
The county reportedly would agree to raise sewer rates no more than 8% a year for three years, and 3% a year thereafter.
Alabama would provide a moral obligation pledge as credit enhancement for the refinancing of the outstanding variable- and auction-rate sewer system warrants. The county has defaulted on the warrants and creditors have not received full payment for more than three years.
Commissioner Jimmie Stephens, who heads the board’s finance committee, would not confirm or deny the newspaper’s report. He did say Wednesday that terms of the indigent reserve were still being hammered out.
“Negotiations are now ongoing in New York and one could assume that the information [about the county’s latest offer] came from there,” Stephens said, referring to details released only to the Birmingham News.
When asked if the commission would make information about the settlement available to the public, Stephens said that a “short-term sheet” is being considered at this point.
“The actual settlement, if reached, will be very lengthy,” he said. “I would anticipate a public hearing if and when it is finalized.”
Stephens also said he is “worried about the macroeconomic events of this past week and the negative impact it could have on this issue.”
“A great deal of wealth has been lost,” he said.
The request for creditors to fund an indigent reserve is a new element of the settlement that was not brought to light previously and it does not address how the county, or the sewer system’s court-appointed receiver, plan to spend $75 million Jefferson County received from a Securities and Exchange Commission agreement with JPMorgan, the county’s largest creditor, to settle securities fraud and other charges related to the sewer debt.
Jefferson County initially received $50 million directly from JPMorgan, which also forfeited $647 million of swap termination fees.
Another $25 million came from the SEC to assist those harmed by the sewer deals.
JPMorgan did not admit or deny guilt in its agreement with the SEC, and the firm had no comment Wednesday about the county’s latest settlement offer.
“I believe the most important part of any deal with the sewer debt creditors is some sort of assurance that sewer revenue will be able to service the outstanding debt,” said Andreas Rauterkus, assistant professor of finance at the University of Alabama at Birmingham’s School of Business. “I am not sure, however, if asking the creditors to provide the means for the [indigent] relief fund will sit too well with them not so much because of the amount, but because of the precedence it would set.”
Both Stephens and commission President David Carrington have said that if creditors do not accept the county’s terms, they will not agree to continue negotiations after Friday, when the commission has another closed-door meeting scheduled with attorneys.
If there is no settlement, commissioners could vote to file the largest municipal bankruptcy in U.S. history, which would include the county’s $4.1 billion of debt outstanding, including general obligation bonds. The sewer debt is nonrecourse and secured
only by the revenues of the sewer system.
Matt Fabian, managing director at Municipal Market Advisors, said he believes a settlement will occur because bankruptcy makes negotiations more difficult.
Whether Jefferson County will have trouble re-entering the bond market in the future to finance capital needs depends on how the troubled sewer debt is restructured, he said.
The county reportedly has promised to allow the Legislature to create a nonprofit public benefits corporation to issue restructuring debt and manage the sewer system.
“Jefferson County’s market access to restructure the sewer debt depends on how the new borrowing entity is structured,” Fabian said. “If it’s given a superior lien on sewer revenues, the ability to raise rates as needed, and, most importantly, is insulated from a hypothetical county bankruptcy and county commission decision making, then there’s no reason it cannot come to market.”
A moral obligation pledge by the state to provide credit enhancement will help the sale of the restructuring bonds but not as much as a similar pledge from other states, he said.
“Alabama has not acted in the best interests of bondholders through most of this crisis,” Fabian said. “Willingness, as opposed to ability, is in question for both the state and any political official associated with … Jefferson County.”
In addition, he predicted that interest rates for the restructured bond sale could be “relatively high.”
“That’s only fair, seeing as how the county and state have played hardball with creditors over the last few years,” he said.
Separately from the sewer debt settlement talks, Jefferson County is experiencing a concurrent financial crisis due to the loss of an occupational tax earlier this year that provided a significant source of revenue for the county’s general fund.
State lawmakers, who control the purse strings because Alabama counties lack home rule authority to raise taxes and revenues on their own, refused to provide the county with relief earlier this year during their regular session.
That led the county to lay off 500 workers, and commissioners are still trying to cut the budget to deal with the lost tax revenue.
Commissioners and their consultants and attorneys have said that both the sewer debt problem and the loss of general fund revenue must be resolved at the same time because even if there’s a settlement over the sewer debt, the county could still be forced to file for bankruptcy if there’s not enough revenue to pay other bills.
Rauterkus said the attempt to resolve both elements of the county’s fiscal crisis at the same time could be part of the county’s legal strategy.
“I think that we would not be talking bankruptcy right now if it wasn’t for the loss of the occupational tax,” he said. “I think that this puts enough political pressure on the Jefferson County legislators in Montgomery and the governor to get some sort of replacement tax.”
Gov. Robert Bentley, who got involved with the county’s settlement negotiations recently along with state finance director David Perry, has said he would be willing to call a special session if there is agreement from lawmakers in advance to support the plans necessary to solve Jefferson County’s problems.
“The governor has said on several occasions that he does not want a bankruptcy and that it would tarnish Alabama’s reputation,” Rauterkus said. “He is certainly right there.”