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Jefferson County's Insolvent Sewer System to Get Receiver, Judge Says
An Alabama Circuit Court judge said he intends to appoint a receiver to manage Jefferson County’s insolvent sewer system, two years after the bondholders’ trustee sued to improve the system’s operation and boost fees to repay more than $3 billion of debt.
Judge Albert Johnson said in court today in Birmingham that he will interview people for the position and decide on the receiver’s authority.
The Bank of New York Mellon Corp., the trustee for $3.2 billion of Jefferson County sewer bonds, sued the state’s most populous county two years ago, saying it was unable to manage the sewer system.
“The county has had two years to come up with a plan and they haven’t,” Larry Childs, a Bank of New York lawyer, said in an interview in Birmingham. “A receiver is the only hope.”
Jefferson County, which includes Birmingham and has more than 600,000 residents, has struggled to avoid the biggest U.S. municipal bankruptcy after a sewer refinancing arranged in 2002 and 2003 by JPMorgan Chase & Co. collapsed during the credit crisis.
Interest rates on the county’s floating-rate bonds rose to as much as 10 percent when companies guaranteeing the debt lost their top credit ratings because of losses on unrelated mortgage-backed securities. Derivatives tied to the debt worsened the crisis by further increasing borrowing costs.
Bettye Fine Collins, the Jefferson County Commission president, said her biggest concern is that a receiver would impose an immediate increase in sewerage charges. The commission governs the county.
Sewer Bill
The typical county resident’s sewer bill is $50.32 per month, more than cities such as San Francisco, Boston, or Cincinnati, according to Raftelis Financial Consultants. The Charlotte, North Carolina-based firm was hired by the county to review costs and charges.
In February, Raftelis recommended the county raise sewer rates 6.8 percent.
“The only thing we can do is hope for the best and that he or she will be prudent about raising sewer rates,” Collins said in an interview after the commission met today.
More than $2 billion of Jefferson County’s sewer bonds were issued as auction-rate securities, long-term debt that allowed municipalities to borrow at short-term yields. The market collapsed in 2008 when banks stopped buying unwanted notes, stranding investors.
Most of Jefferson County’s auction-rate securities are held by JPMorgan and Bank of America Corp., according to the county.
Floating-Rate Bonds
JPMorgan, Charlotte-based Bank of America and six other banks also hold about $850 million of Jefferson County’s floating-rate sewer bonds under agreements that required them to purchase the debt if other investors couldn’t be found.
The banks, which have the right to demand accelerated repayment on that debt, have given the county a reprieve while it negotiates to restructure the bonds.
In November, JPMorgan settled a U.S. Securities and Exchange Commission probe of the New York-based bank’s bond underwriting and derivative sales to the county without admitting or denying wrongdoing. The company paid the county $50 million, as well as a $25 million federal penalty, the SEC said.
Bank of New York said in a Sept. 1 court filing that Jefferson County can’t hide behind the failure of bond insurance companies or alleged actions by JPMorgan as an excuse for not covering $515 million of bond payments that are in default or for failing to raise sewer rates in accordance with bond offering statements.
County’s Failings
“In addition to diverting monies belonging to the warrant holders, the county has failed to follow the advice of its own professional consultants to raise rates, change the rate structure, and adopt a long-term strategic financial plan,” the New York-based bank said in the filing.
In 2003, a consultant estimated the county needed to raise sewer revenue by 89 percent over six years to meet debt-service requirements.
Collins, the county commission president, said she didn’t know what effect a receiver may have on negotiations with creditors. A new five-member commission takes office in 60 days.
Justin Perras, a spokesman for JPMorgan, declined to comment.
A receiver won’t have unlimited powers, said Thomas Richey, a Bryan Cave LLP partner in Atlanta. Richey served as a receiver in a 2006 case the SEC brought against a Georgia broker.
No ‘Carte Blanche’
“Even though receivers have some pretty significant powers, they don’t have, typically, much more power than the management of the entity,” Richey said. “I would doubt that this receiver has been given carte-blanche authority to do just anything.”
Bank of New York and two bond insurers that guaranteed the sewer debt, Syncora Guarantee Inc. and Financial Guaranty Insurance Co., sued Jefferson County in federal court in September 2008.
In June 2009, U.S. District Judge David Proctor said the federal government lacked the authority to appoint a receiver, based on the Johnson Act of 1934. The law prohibits federal courts from interfering with rate-setting by state utilities.
Bank of New York, without the two bond insurers, also brought a complaint against the county in state court.
To contact the reporter on this story: Kathleen Edwards in Birmingham, Alabama, at
Martin Z. Braun in New York at mbraun6@bloomberg.net.
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