BRADENTON, Fla. — Jefferson County, Ala., commissioners meet Friday with bankruptcy still on the table. Once again, they will consider whether to approve a deal with creditors to restructure $3.14 billion of defaulted sewer debt, or to file for Chapter 9 bankruptcy, or continue with negotiations as they did in August.
Few details have been made public about settlement talks since the commission rejected a proposal by creditors a month ago, and agreed to take another 30 days in an attempt to hammer out an acceptable agreement.
Commissioners in mid-August balked at a settlement that proposed sewer rate increases between 6.1% and 7.8% in October and again in April and October 2012. After that, there would be annual increases of over 3% a year.
The offer from creditors said the county would have to pay back $2.326 billion of the $3.14 billion of outstanding warrants, which included a reserve of $233 million for debt servicing if sewer revenues are not enough to cover payments. The refinancing warrants would have maturities of 40 years and a portion of the debt would be insured.
Board members said numerous times last month that the deal contained contingencies over which they had no control, such as a moral obligation pledge from Alabama for more than $1 billion of the refinanced debt designed to lower interest costs by as much as 100 basis points. Such a covenant would require approval from the state Legislature.
Lawmakers would be asked to create a public benefit corporation to issue new debt to restructure the defaulted sewer warrants, and to take control of the sewer system.
Recently, county commissioners involved directly in negotiations said they objected to the fact that the deal sought by creditors would require that all assets of the sewer system be turned over to the corporation created to sell and pay back the debt.
Gov. Robert Bentley 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.
Bentley’s predecessor, Bob Riley, negotiated a settlement with the help of the New York Insurance Department in September 2008. In those talks, creditors agreed to $1 billion in concessions.
Riley also pledged to use his influence to get lawmakers to accept terms of the settlement, including creation of a corporation, a sticking point with the previous commission, as well as extending the life of an existing local sales tax to help pay down some of the sewer system’s debt.
Bills that would have accomplished many of the agreements Riley’s negotiated with the New York Insurance Department died in May 2009 when Alabama lawmakers ended their session without taking action because the local delegation refused to allow bills to come up for debate.
While legislators have been largely silent about current negotiations, they have also refused to provide the county with fiscal relief since a court struck down a legislatively approved occupational tax that provided a major source of funding for the general fund, creating an additional financial crisis for Jefferson County separate from its sewer debt woes.
Alabama counties do not have home rule, or the authority to implement certain tax hikes or fees to raise additional revenue, without approval from lawmakers.
The loss of the occupational tax led county commissioners to lay off 500 employees and cut millions from the budget. Loss of the jobs tax has also become intertwined with a resolution to the sewer debt issue because commissioners have demanded that the state resolve that problem at the same time.
“Jefferson County’s debt crisis provides fertile ground for illustrating the failures of both transparency and accountability,” according to co-authors of an article in the March-April edition of Public Administration Review. “In many ways, the Jefferson County case serves as a cautionary tale for public administrators.”
The article — “Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County, Alabama” — was written by Michael Howell-Moroney, an associate professor of public administration at the University of Alabama at Birmingham, and Jeremy Hall, assistant professor of public affairs at the University of Texas at Dallas.
“Failures of transparency and accountability by local bureaucratic and political actors, private financial institutions, as well as the larger regulatory framework governing public finance” are the systemic causes of the county’s crises, the authors wrote.
They said factors underscoring the failed sewer bond deals and swaps included questionable local decisions to refinance the sewer debt into back-loaded variable- and auction-rate warrants to avoid steep rate increases, along with overbuilding the sewer system, the collapse of bond insurers, rating agencies that gave the county high marks despite the overleveraged sewer system, and widespread corruption.
A “litany of failures,” the authors said, included the fact that state law exempts revenue debt — such as the sewer warrants — from borrowing caps. They question whether county officials should have commissioned a debt-capacity study including all debt. They also found troubling the fact that Jefferson’s regular audits “failed to raise any significant red flags.”
The authors also questioned the involvement of the financial sector and said “we see a widespread lack of accountability and fiscal prudence in the private sector.”
Did the private sector’s failures caused Jefferson County’s problems? “We think not,” the professors wrote. “The county’s burgeoning debt likely still would have reached crisis proportions.”
They recommended imposing limits on borrowing as well as better regulation of interest rate swaps and requiring the use of sensitivity analysis at each stage in the process of considering the use of debt.
“As the global crisis deepens, failures such as those demonstrated in Jefferson County may become commonplace as greater pressure reveals the failures in municipal governments nationally,” the authors said. The Jefferson County case “reveals areas in which greater accountability enforcement should be directed at the local, state and national level to prevent future crisis.”
“It is our hope that the Jefferson County experience will serve … to prevent similar financial ruin in other municipal contexts,” they said.
Alabama lawmakers have imposed some restrictions on Jefferson County’s future use of debt and swaps, including requirements to improve public transparency in the consideration of new offerings. Plans to improve local debt issuance standards statewide have failed to gain traction.
Friday’s special meeting of the County Commission begins at 10:00 a.m. Central time. The board may go into closed session to discuss legal options. It is not clear if there will be public discussion.
