Jefferson County debt crisis

The Jefferson County debt crisis emerged in late 2007 as interest rates for the county's enormous sewer construction debts shot upwards during a national crisis in the mortgage lending market. The county is attempting to negotiate with bondholders to formulate a repayment plan that would keep sewer rates, which have increased over 600% since 1992, at "reasonable" levels. If negotiations do not bring a satisfactory result, the county has mentioned the possibility of defaulting under Chapter 9 bankruptcy protection. If the county did default on its debts, it would be the largest bankruptcy by a municipal government in United States history.

Sewer construction

The Jefferson County sewer system incurred enormous debts in the late 1990s for repairs, upgrades and expansion of its sewer and water treatment infrastructure. Part of the work was required by a 1996 consent decree forged to insure that the system complied with the requirements of the federal Clean Water Act. Other expansion was undertaken at the same time to add ratepayers to the system to help pay back the debt and to promote development in the county. As costs continued to climb, rate-payers saw their sewer rates shoot upwards to service the bond debt. A 2003 audit of the sewer project found a critical lack of planning, unqualified project management, serious accounting deficiencies, and arrangements with contractors that opened the county to unusual risk. Later it was found that numerous county officials had accepted bribes from contractors.

Bond swaps

Efforts to hold down increases in sewer rates led the county to negotiate numerous refinancings of its bond debts. Following the advice of outside financial consultants and its own finance director, Jefferson County entered into an extraordinary number of interest rate swaps.

Of the $3.2 billion borrowed, nearly $1 billion was used to create a reserve fund, to refinance old debts, and to pay consultants and underwriters. $100 million of that was spent on bond insurance and professional fees, which amounts to 3.2 percent of the total amount borrowed, more than triple the common rate of 1%. Based in part on those unusually high fees paid to bankers and advisors, the Securities and Exchange Commission has opened an investigation into possible violations of securities laws.

Crisis

Due to a national crisis in the mortgage lending sector which emerged in 2007, the insurers, which were supposed to have kept the bonds' variable interests rates low, were no longer able to cover the bonds. As a result, interest rates shot up from around 3% to over 10% at variable-rate auction. With no ability to cover the massive debt service payments, the county entered into emergency negotiations with its bondholders and began openly considering Chapter 9 bankruptcy.

Commission president Bettye Fine Collins has proposed applying $27 million per year in revenues generated by a 1 percent sales tax for school construction toward servicing of the bond debt. The proposal would require approval from the Alabama legislature as well as from bondholders. In a two-day conference with county lawyers and bondholder representatives on Wall Street it was recommended that the debt be financed primarily through continued increases in sewer rates. According to bankruptcy attorney Patrick Darby, investment bankers at those meetings "pounded on tables, screamed at us and told us to raise taxes." County officials have maintained that sewer bond creditors are entitled only to revenues from the sewer system.

During the first half of 2008 the county employed Porter, White & Company as negotiators with bondholders' representatives. The company put together a proposal which combined the $27 million from sales tax revenues with $10 million a year from the general fund and an annual sewer rate increase of 2.85 percent. The Commission rejected the deal and terminated its contract with Porter, White in July. They also ended a contract Merrill Lynch & Company, which had been hired as advisors only a month before and signed new contracts with Sterne, Agee & Leach and Morgan Keegan & Company.

Meanwhile the bonds' insurers continued to see their investment ratings downgraded, increasing the county's interest payments and lawyers challenging the constitutionality of the Jefferson County Occupational Tax filed for a lien against the county's general fund in probate court, signaling that, if successful, their suit could obligate the county to refund millions of dollars in previously-collected taxes.

In November 2008 District Court Judge David Proctor appointed two "special masters" to report on the county's financial situation and mediate its standoff with its bond insurers. Their combined 60-page report, delivered in February 2009, concluded that sewer rates would have to grow enormously unless the federal or state government intervened. They recommended adding a processing fee for private meters on irrigation systems, imposing a "clean water fee" on non-sewer customers who benefit from the environmental safeguards constructed into the system, eliminating the 15% credit for water not returned to the sewer, and raising rates 25% per year unless governmental relief is secured. Proctor ruled that the nearly $800,000 in fees billed by the special masters would be split evenly by the county and its insurers. They submitted a final report in July 2009 expressing regret that they did not effect a solution and repeating their recommendations for the county and other parties.

In March 2009 JP Morgan Chase & Co. terminated another set of interest-rate swap agreements, adding $748 million to the county's financial liability, which now exceeds $3.9 billion.

Strategies

A majority of County Commissioners have been working with various advisors, including Citigroup and Haskell Slaughter Young & Rediker, to create a plan for eliminating the debt and avoiding bankruptcy. Though the details have evolved, the plan generally involves small, steady increases in sewer rates beginning in 2012 coupled with certain automatic revenue increases (such as property tax, occupational tax and sales tax) which would be triggered by the amount of payments due. No progress on that plan was made during the subsequent legislative session.

A competing plan, suggested by David Bronner, head of the Retirement Systems of Alabama, would be for the county to proceed with authorizing a Chapter 9 bankruptcy filing and then sell the sewer system to raise cash. He estimates the system's assets are worth about $1.5 billion, which would leave $1.7 billion in debt to be absorbed by the county's bondholders and bond insurers. Bronner suggested that the RSA could negotiate to be the purchaser of the system and would be willing to sell it back to the county for the same price.

The Commission has been divided on how to proceed. Collins, Bowman and Smoot favor further negotiations aimed at avoiding bankruptcy, while Carns and Humphryes are convinced that filing Chapter 9 is unavoidable. Over their objections, the Commission voted in early August to hold a non-binding referendum during the November election to get public input on the issues facing the county. Facing what they have described as a "groundswell of community support" for Bronner's plan, Collins initiated a public relations campaign aimed at educating voters about the danger of bankruptcy. WilbanksElam put together a broad-based effort to counter Bronner's plan under contract with the County and with financial assistance from local businesses as well as from national lenders who stand to lose hundreds of millions of dollars if the county entered bankruptcy protection. A proposed settlement would waive payment of the swap termination fees and provide other concessions totaling $1.3 billion, or about a third of the total debt.

Riley's efforts to negotiate with bondholders continued into 2009 as various bills intended to improve the situation were debated in the Alabama legislature. The most crucial legislation would have allowed sales taxes collected for school construction to be applied toward paying down the sewer debt. That bill died in session. Other legislation replacing the controversial Jefferson County occupational tax also died in the state legislature, effectively cutting a quarter of the county's annual revenues and forcing drastic cuts in county services.

In March 2009 the County Commission acted on one of the recommendations from the February 2009 special masters' report by imposing a $12 processing fee on newly-installed private water meters used on irrigation systems. In early July District Court Judge David Proctor accepted a final report from the special masters, but later the same month enjoined them to continue working alongside magistrate judge John Ott to try to reach a negotiated resolution.

References

• Hansen, Jeff (March 9, 2008) "Jefferson County, Alabama sewer debt grew into crisis." Birmingham News
• Hansen, Jeff and Eric Velasco (March 23, 2008) "Jefferson County sewer debt crisis contained key players." Birmingham News
• Wright, Barnett (March 27, 2008) "Investment bankers, creditors tell Jefferson County to raise sewer rates." Birmingham News
• Wright, Barnett (April 6, 2008) "Jefferson County sets stage for possible bankruptcy, while saying filing is last resort." Birmingham News
• Wright, Barnett (June 25, 2008) "JJefferson County faces new challenges finding solution to bond debt crisis." Birmingham News
• Hubbard, Russell (July 4, 2008) "Jeffco sewer crisis adviser Porter, White & Co. released after plans not embraced." Birmingham News
• Hubbard, Russell (August 7, 2008) "Nearly $1 billion of Jefferson County sewer debt went to advisers, debt service, reserves." Birmingham News
• Whitmire, Kyle (July 31, 2008) "The end of the line." Birmingham Weekly
• Wright, Barnett (August 9, 2008) "Jeffco sewer debt hearings frustrate, education residents." [sic] Birmingham News
• Hubbard, Russell (August 16, 2008) "Bronner: Bankruptcy will stop Wall Street money train." Birmingham News
• Wright, Barnett (August 17, 2008) "Jeffco bankruptcy foes to launch blitz." Birmingham News
• Wright, Barnett (February 12, 2009) "After one year, is Jefferson County any closer to solving its sewer debt crisis?" Birmingham News
• Wright, Barnett (March 11, 2009) "Jefferson County sewer debt balloons to $3.9 billion." Birmingham News
• Wright, Barnett (April 5, 2009) "Special masters ordered to review the Jefferson County, Alabama sewer system have filed a $797,224 bill." Birmingham News
• Chandler, Kim (May 16, 2009) "Major cuts loom as Jefferson County, Alabama occupational tax fail in Alabama Legislature." Birmingham News
• Hansen, Jeff (July 18, 2009) "Jefferson County, Alabama special masters fail to resolve sewer debt fracas." Birmingham News
• Gordon, Robert K. (July 28, 2009) "Special masters, magistrate can continue working on solution to sewer debt crisis, judge says." Birmingham News

External links

• Birmingham News graphic covering the details of the bond debt crisis
• Birmingham News timeline covering the sewer construction and bond debt crises
• U.S. Government document outlining the Bankruptcy code for Chapter 9