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.

Jefferson County

U.S. Bankruptcy Judge Thomas Bennett this week said bankrupt Jefferson County, Alabama, does not have to immediately face a lawsuit over its decision to close the emergency room of its money-losing hospital for the poor. Judge Bennett held that the city of Birmingham cannot proceed with a lawsuit seeking to keep the emergency room open after Dec. 1, the day the county plans to end in-patient care at Cooper Green Mercy Hospital. Last August, the judge had said he was inclined to halt the case. At that Aug. 30th hearing, he told lawyers for the city that, “What I’m looking at is really an action to try to control the operations’’ of the county, which isn’t allowed under Chapter 9 of the U.S. Bankruptcy Code. In a hearing this week, Judge Bennett confirmed his decision.  The battle over the hospital is the first time the county’s health-care responsibilities have been part of its bankruptcy case. The county has focused on cutting bond debt tied to the county’s sewer system and replacing a wage tax that brought in more than $60 million a year before it was voided by a state court.

JeffCo

Jefferson County, which is under Chapter 9 federal bankruptcy, intends to appeal U.S. Bankruptcy Judge Thomas Bennett’s refusal to let the county reduce payments to bondholders. Judge Bennett had ruled in June that the county cannot cut the payments so it can spend more on its aging sewage system or pay legal fees. Lawyers for the county said in a filing this week they will appeal the ruling. Bondholders are owed more than $3 billion, debt that is backed by the payments made by business and residents in Alabama’s biggest county. The county filed the biggest municipal bankruptcy in the U.S. after elected officials and creditors failed to implement a proposal to cut the sewer debt by about $1 billion.

Jefferson County

After approving a fiscal 2013 budget this week, Jefferson County, Ala., advised holders of its general obligation warrants they would not be paid. The county, still in bankruptcy, reported in a in a disclosure that it plans to default on the GO warrants until they are restructured under a plan of adjustment in its Chapter 9 case. Jefferson County has about $95.5 million of outstanding fixed-rate GOs insured by National Public Finance Guarantee Corp.; another $105 million of GOs are in variable-rate mode. The $15 million that would have been paid on the GO warrants in the coming year is expected to help the county pay its bankruptcy attorneys, according to published reports. Jefferson County also disclosed to investors it did not make the required payment to the Jefferson Public Building Authority for the 2006 lease revenue warrants that were sold to build a county courthouse, jail, and a 911 emergency call system; the reserves will be used to make the interest payment, the county said. It is not clear if any principal payment is due. The lease warrants are insured by Ambac Assurance Corp. The county had planned to reject the lease through the bankruptcy process. In recent weeks, attorneys said in court filings that the county was negotiating with Ambac. County Commissioners this week passed a resolution agreeing to a term sheet that would reduce annual lease payments and extend maturities.