Municipal Sewerage Distress

A proposal by Jefferson County to factor corruption into future sewer system rate increases is setting the stage for another legal fight with the trustee for the system's $3.2 billion of defaulted sewer warrants. The county, in addition to corruption that increased costs of rebuilding the system, is proposing to factor in a new valuation of system assets that could be significantly less than the outstanding debt. Those elements, as well as an overhaul of the system rate structure anticipated to result in an estimated 5.9% increase in revenues, were set to be considered when county commissioners held their only public hearing on rates for the first time since at least 2008. The proposed rate increase is one of the first major steps the county has taken since filing the largest municipal bankruptcy in the nation last November with more than $4 billion of outstanding debt. Bank of New York Mellon, trustee for the sewer warrants, in its court filing, wrote that it wants a detailed financial examination of sewer system records, because the county has not clearly explained income and expenses of the system since regaining control of it in January from a state-court appointed receiver. The bank also objected to the county’s complex plan for evaluating future rate increases, and objected to considering them based on the value of the system as well as past corruption. Rates should be based on claims for paying the outstanding debt, according to the bank: “To the extent the county’s own fraud, graft, corruption, waste, and gross incompetence in the construction of the system resulted in the county spending more money than it might have otherwise spent on the system but for such misconduct, it is unimaginable that the warrant holders who loaned the money to improve the system should bear the consequences of the county's actions.” BNY Mellon also complained that the county’s proposal lacked detail. Federal bankruptcy Judge Thomas Bennett has been asked to consider the trustee’s request for a financial examination during a regular hearing scheduled for next Thursday. In the nonce, Judge Bennett scheduled an expedited hearing to consider Jefferson County’s motion to bypass lower courts and appeal directly to the 11^th Circuit Court of Appeals.