BRADENTON, Fla. - Alabama Magistrate-Judge John E. Ott has recommended postponing Monday's federal receivership hearing of the Jefferson County sewer system until Feb. 25.
The recommendation, on which U.S. District Court Judge R. David Proctor has yet to rule, is echoed
The special masters were appointed by Proctor to delve into the finances of the sewer system, which is upside down because of $3.2 billion of debt and approximately $5 billion of swaps. Most of the debt is in variable- and auction-rate mode, and it threatens to push the state's largest county, whose seat is Birmingham, into what would be the largest ever municipal bankruptcy in U.S. history.
Jefferson County officials have been negotiating with creditors for nearly a year on concessions and restructuring the debt.
With no agreement on the table by August Republican Gov. Bob Riley stepped in as facilitator and a short time later the bond market grew more volatile. Today, the market remains practically inaccessible for lower-rated credits. With the possibility of bankruptcy looming, Jefferson County's credit ratings last year sank below investment grade.
As restructuring talks dragged on even with Riley's intervention, Syncora Guarantee Inc., Financial Guaranty Insurance Co., and the Bank of New York Mellon, as trustee for Jefferson County's troubled sewer debt, filed suit in federal court on Sept. 16 against the county and the County Commission seeking the appointment an independent receiver to manage the sewer system and implement measures to raise revenue.
FGIC and Syncora insure approximately $2.8 billion of Jefferson County's sewer debt.
On Nov. 24, Proctor appointed two special masters and ordered them to investigate, make recommendations, and to mediate any dispute among the parties regarding the operation of the Jefferson County sewer system, including the enhancement of revenue, rates, potential reductions in expenses, claims against other parties, and any related matters.
Proctor appointed as special masters John Young, president of Voorhees, N.J.-based American Water Services Co., an investor-owned water and wastewater utility company, and John Ames, a tax, finance, and bankruptcy attorney with Louisville, Kent.-headquartered Greenbaum Doll & McDonald PLLC.
Proctor's order charged Young with evaluating operations and business aspects of the sewer system, including its rate structure. Ames was charged with reviewing governing legal documents, debt holders' collateral, operating payments, potential claims, legal issues pertaining to rates, and revenue enhancements. Magistrate Ott was appointed to assist the special masters.
In a six-page report filed Monday, the special masters provided no detail about their investigation of the sewer system and spoke in generalities about ongoing attempts to restructure the troubled debt. They also recommended delaying decisions about the system's operating reserve until Feb. 25.
The special masters said securing sufficient funding to meet the sewer debt service and principal payment obligations would require a "comprehensive resolution involving potential state legislative action, federal government assistance, and the cooperation of parties to this action and the various liquidity banks."
Their report noted that the Alabama Legislature's regular session does not begin until Feb. 3, and the new presidential administration's term did not start until after Tuesday's inauguration of President Obama.
"Although certain parties are working with representatives of the federal and state governments, no significant progress is possible until late January or February," the report said.
The county and the insurers should continue to "investigate and pursue options for federal and state government assistance to reduce interest rates and/or provide for payment on, or refinance of, the outstanding obligations," the special masters recommended.
They also recommended that the county develop plans to improve the sewer system's operating efficiency and make more of the operating budget available for debt service, implement revenue enhancements that more closely approximate the actual cost of services, determine the practicality of "implementing user fees to account for reserve capacity and the societal benefits" provided by the sewer system, and audit revenues to verify customer accounts and payments.
The special masters said they should continue their investigation and evaluation of claims, as well as efforts to bring about a consensual effort to the disputes, but provided no other details.
"This is somewhat disappointing as a special report," said Jeffrey Cohen, with Cohen & Associates PC in Denver, whose work includes municipal bankruptcy and creditor's rights.
"If [the special masters] were there to propose solutions, they don't seem to have proposed solutions," Cohen said. "They could be negotiating solutions on these issues and the masters don't want to go ahead of, or be out in front of, the negotiations."
Attempts were made to contact the special masters about the report. Young declined to comment and said that the judge has not allowed them to "engage the press" while in their roles as special masters.
Although Riley has not spoken publicly about restructuring plans, they were unveiled in October by New York Insurance Department. The governor had called on the department to help with negotiations because it regulates the banks and bond insurers that are Jefferson County's creditors, including FGIC and Syncora.
New York officials said they helped negotiate more than $1 billion in concessions, including swap termination fees. In return, Jefferson County must agree to place the sewer system under a control board, agree to a covenant to increase sewer rates less than 3% a year, and come up with $26 million of additional revenue to help pay down some of the sewer debt.
The plan would result in refinancing the sewer debt, a commutation of bond insurer policies, and most likely would include deeply subordinated debt.
Legislation that would help Jefferson County accomplish its tasks is expected to be submitted to state lawmakers in February.
Riley unsuccessfully tried to obtain a backstop or guarantee for the refinanced debt from the outgoing Bush administration. The county plans once again to ask for federal relief from the Obama administration.
