BRADENTON, Fla. - Behind the scenes for the past few weeks, officials at the New York Insurance Department intervened at the request of Alabama Gov. Bob Riley in the negotiations aimed at preventing Jefferson County from filing the largest municipal bankruptcy ever in the U.S.
It was a strategic move by Riley that paid off. But it might be short lived if Jefferson County cannot find additional revenue to pay down a portion of the $3.2 billion of troubled sewer debt.
New York insurance officials - viewing themselves as trusted intermediaries having pre-existing relationships with the same banks and insurers that are now Jefferson County's creditors - negotiated $1 billion in concessions.
They say that's triple the amount of concessions on the table before they intervened.
But those concessions come with contingencies that require Alabama lawmakers to take certain actions, including the creation of a control board or authority to oversee the county's sewer system. That's a provision a majority of county commissioners opposed in earlier talks.
The current deal also suggests extending the life of an existing local sales tax to help pay down some of the sewer system's debt.
Legislators representing Jefferson County met with Riley Tuesday to discuss the restructuring plan. Many oppose extending or otherwise using the local sales tax, according to a report in the Birmingham News. And Jefferson County officials have said they do not have other funds to contribute.
The ultimate resolution of the county's financial crisis, particularly if it ends in bankruptcy, could have wider implications as the current freeze in liquidity continues to deny local and state governments access to the bond market, and pushes financing costs up.
Since it is essential that municipal governments be able to borrow, it is important to avoid anything that could further disrupt the market, said Eric Dinallo, superintendant of the New York Insurance Department. With the current difficulties in the municipal bond market, a major bankruptcy could delay its recovery.
That's one reason he said his agency got involved in Jefferson County's negotiations.
"We thought that it was a unique situation," Dinallo said, adding that he believes his office helped forestall a bankruptcy filing.
"We worked intensely for a couple of weeks, held a lot of meetings with the banks, insurers, and liquidity providers, and we hammered out this agreement, which I think is a really fantastic opportunity for the county, and for the bondholders - and maybe as importantly for the people who live in the county who otherwise would end up with much higher rate increases without this transaction," Dinallo said.
"Our job was to come up with the $1 billion, which we did," he continued. "It's now up to Alabama to do certain things."
Dinallo said he and experts in his department produced a firm deal with Jefferson County's creditors, but it has contingencies.
In return for $650 million in cash concessions and $350 million in torn-up swap agreements and other fees from creditors, Dinallo said Jefferson County must agree to place the sewer system under a control board or authority. County officials need to come up with some additional revenue, and suggestions have been made that the Legislature allow the county to extend an existing sales tax as part of the restructuring plan - an idea that local lawmakers are resisting.
"There would need to be some [additional] revenue," said Dinallo, who indicated that the county and the state must decide where it would come from.
The deal now on the table was negotiated to reduce the county's overall sewer debt. It also would result in a refinancing and commutation of bond insurer policies, according to Hampton Finer, deputy superintendent and chief economist at the New York Insurance Department, who was a primary negotiator.
Financial Guaranty Insurance Co. and Syncora Guarantee Inc. are the major insurers of the county's sewer debt. Financial Security Assurance Inc. backs a minor portion of the sewer debt.
FSA and other insurers most likely would be called upon to insure the refinanced sewer debt, Finer said. The deal also would include a covenant to increase sewer rates less than 3% a year and most likely would include deeply subordinated debt.
"Those are the basic conditions to get the refinancing off the ground," Finer said. "The question becomes can the sewer system sustain so much debt, and it depends on what the market will bear."
Such a deal might be impossible to launch because of continuing market volatility, but Finer said the actual refinancing would be months off. When the bonds would sell, "depends on market conditions," he added.
Negotiating the deal wasn't easy.
"We're dealing with a difficult situation in Alabama. It's a tough situation for everybody," Finer said. "If it's going to get done, this will do it. It requires the county and the state to do their part."
In seeking additional assistance for Jefferson County's sewer restructuring plan, Riley sent a letter on Monday to Neel Kashkari, the interim assistant Treasury secretary who oversees the Troubled Asset Relief Program created as part of the Emergency Economic Stabilization Act of 2008.
Riley asked Kashkari if TARP could provide a backstop for the county's proposed refinancing plan. It calls for refinancing debt with 50-year maturities. Most of the troubled debt was sold with 40-year maturities.
In a related development, Jefferson County commissioners today are meeting in special session to consider extending forbearance agreements through Oct. 31. The county has already defaulted on some sewer debt payments. In the forbearance agreements creditors pledge not to take any action to force payments that are due while restructuring negotiations continue.