Receiver Floats Rate Hike for Jefferson County Sewers

BRADENTON, Fla. — The receiver appointed to take charge of the debt-laden sewer system in Jefferson County is recommending that rates be increased to counter a decline in the number of customers, maintain the system and pay outstanding debt.

In an interview Tuesday, John Young said Alabama’s largest county and its creditors are far apart on a settlement on $3.14 billion of mostly variable- and auction-rate warrants that are in default. Only about 6% of the outstanding sewer debt is fixed rate.

A 25% rate increase would take effect Sept. 1 and would be the first of several annual double-digit increases under Young’s plan.

The county asked Young last Friday to present creditors with a settlement offer that sought a haircut of “much, much more than $1 billion,” he said, declining to provide any other specifics about the offer.

“They will reject it, because it seeks huge concessions,” Young said, adding that the county’s latest offer is similar to others made over the past three years since the credit market froze and liquidity dried up as bond insurers suffered downgrades. The creditors, mostly banks and insurers, now own the debt and related swaps are in default.

When asked if a solution to the debt problem is possible, Young said: “Obviously, anything is possible. If you talk to the creditors, they prefer to just get out of Jefferson County. I think there’s a possibility that the concessions they give may be more under a restructuring than a refinancing because it allows them to get out.”

A refinancing would enable creditors to get paid off and new bondholders to assume the debt, while a restructuring could require existing bondholders to take a haircut and continue to hold investments in the sewer system.

JPMorgan, the county’s largest creditor, declined to comment about Young’s report or settlement negotiations. In a settlement over securities fraud with the Securities and Exchange Commission, the investment bank forfeited $647 million of swap-termination fees with the county. While JPMorgan did not admit or deny guilt, the firm also paid $75 million to the county related to the SEC settlement.

The county owes about $100 million of swap-termination fees to other banks.

Young was appointed to take over the sewer system last September by Jefferson County Circuit Judge Albert Johnson after the trustee for the sewer warrants, Bank of New York Mellon, sued for the system to be placed into receivership.

Johnson found that the county violated bond covenants, defaulted on the bonds and failed to pay accelerated principal payments.

“A receiver will be able to stabilize the system finances and will also be able to implement significant operational improvements and efficiencies that will generate more system revenues and more net revenues available for debt service than previously produced,” Johnson said in his ruling.

Young left his job as president of New Jersey-based American Water Works Service Co. to become Jefferson County’s sewer system receiver.

On Tuesday, his first interim report was filed with the court. At the same time, he launched a new website where he posted the court report for the public to read, along with supporting documents and studies.

The website, where comments can be submitted, is at www.jeffcowastewaterfacts.com. Young has also scheduled a public hearing for June 29 to take comments at the Jefferson County Courthouse in downtown Birmingham.

“I thought it was really important in this process to educate the public,” he said, referring to the volume of information made available concerning the history of the sewer system and other documents. “I want everyone to understand the hard truth.”

In addition to the first rate increase in three years, Young wants to institute a program to help low-income households pay their bills.

Another facet of his plan is a program to help customers learn to use water wisely and reduce their sewer bills. He is proposing that the $2 million education program be funded out of the $75 million the county received from JPMorgan’s settlement with the SEC.

A multitude of documents supporting his recommendations on the website include studies comparing Jefferson County’s sewer system with others under federal consent decrees, as well as how rates were developed using Environmental Protection Agency standards.

His report includes suggestions for raising additional revenue, including increasing an existing ad valorem tax that already supports Jefferson’s sewers. That property tax has not been increased for decades and now provides 4% of the system’s revenues.

Young has also suggested implementing a “clean water fee” that non-sewer system customers would pay because they benefit from cleaner local waterways as a result of the rehabilitated sewer system.

Young said he expects his rate increase to be subject to a legal challenge that Alabama’s Supreme Court may eventually settle.

“I’m determined to implement my recommendations unless a court stops me,” he said.

On Tuesday, Jefferson County Commission President David Carrington reportedly announced that the board would ask a judge to order mediation in the debt settlement negotiations.

Young, who believes the ultimate solution must be negotiated, called the timing of the request for mediation “suspect” since it occurred just before the release of his report seeking a rate hike. He said his challenge is determining if the county’s request for mediation a serious attempt to reach a settlement or “just another means to delay the inevitable.”

“A negotiated solution is ultimately what we need here,” he said. “We have a long way to go.”

Challenges include the differing interests of the investors and the political challenges to accomplishing a solution given the differences between county and state lawmakers, Young said.

There are four major creditor groups: JPMorgan, the bond insurers, the liquidity banks and a group that includes pension and hedge funds and individuals.

“Just trying to get them in the same room and in the same universe with respect to a solution is a challenge,” Young said.

Some of the warrants are still traded and he expected trading to increase as a result of his report and the prospect for additional revenue to pay off the debt, he said.

The solution to the county’s complex financial problems won’t be just about “dollars,” he said, it will also include legislation necessary to create a new, independent entity to accomplish a restructuring or refinancing of the troubled warrants.

Young said for many years it has been difficult for the county to work with local lawmakers on legislation. He pointed to the most recent cycle this year when legislators failed to provide the county fiscal relief to make up for the loss of revenue after an occupational tax was struck down by the courts.

The sewer crisis has its roots in the consent agreement with the federal government to rehabilitate the system and massive corruption related to implementing that work as well as financing it, Young said. A history of the project is also posted on the new website.

Problems for the sewer system began even before the consent decree was signed many years ago, Young noted, and county officials were unaware of the scope of work that was required. “They spent money too fast on too many projects, but clearly there was some corruption in some of the refinancing with the variable-rates and swaps,” he said.

The county has spent $2.4 billion of $2.7 billion it raised through issuance of the warrants for sewer system repairs and improvements. “That’s more than I’ve ever seen spent on a customer base of this size,” Young said.

In addition, the warrants were heavily back-loaded in maturities, adding to the complexity in solving the debt problem.

“What everyone would like to do is refinance at fixed rates and get the debt down to a level that ratepayers can support,” he said. “Creditors would like to get some money out of this, although it will be difficult to get it done at par. Trying to decide the right number is what the challenge is.”

“It will take a little pain from everybody” to reach a solution, Young said. “It’s going to take some really bold politicians to make the really hard decisions.”

When asked if the sewer system’s problems could force Jefferson County to file for bankruptcy, Young said that misinformation has led people to believe that bankruptcy is an avenue for the government to shed some or all of its debt.

“The sewer system will not drive the county into bankruptcy,” Young said. “The warrants are paid from net sewer system revenues.”

If the county files for municipal bankruptcy, he would still remain receiver charged with maintaining a utility that complies with environmental regulations, he said.

Young said his experience as the receiver in Jefferson County has been unique compared to jobs in the past, partly because of Alabama’s “politically challenging atmosphere.”

“I’m really committed to solving this problem,” he said.

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