Jefferson County Sewer Receiver Fights for Control of Star-Crossed System

Jefferson County, Alabama, and its creditors meet Nov. 21 for the first fight of the biggest U.S. municipal bankruptcy -- whether John S. Young Jr., the sewer system’s court-appointed receiver, should go home to New Jersey.

The Cherry Hill water executive has been running the utility, with more than $3.1 billion in defaulted debt, since the end of 2010. He says he’s Birmingham’s least-popular man.

“I’ve been called everything from the devil, which in the Bible Belt is not a good thing to be called, to a carpetbagger, to the sheriff of Nottingham,” Young told the American Water Summit in Atlanta last week, hours before Alabama’s most- populous county declared bankruptcy. “They refer to me as Tony Soprano,” television’s Garden State crime boss.

An Alabama judge appointed Young, 58, to raise revenue and cut costs after a lawsuit by insurers and the bond trustee, Bank of New York Mellon Corp. (BK) Young said yesterday in a New York interview that should U.S. Bankruptcy Court Judge Thomas B. Bennett remove him, investors would have weaker protection and the bond market would be harmed.

Since December, Young has been paid more than $1 million to be the voice of creditors, including those who enabled the risky financing that caused the crisis in 2008, county records show. He has proposed raising sewer rates 25 percent in a place where he says a fourth of his 126,000 customers are at or below 1.5 times the federal poverty rate.

Demand for Cash

In June, he demanded $75 million from the county: The money came from a U.S. Securities and Exchange Commission settlement with JPMorgan Chase & Co. (JPM) tied to an unlawful payment scheme. He held off while a settlement was under discussion between the county and banks and insurers.

Young negotiated a deal with creditors, of which JPMorgan is the largest, that included $1 billion in concessions. Commissioners said that was $140 million shy of what was promised and that they couldn’t count on the Alabama Legislature to deliver its part of the deal.

The county declared bankruptcy Nov. 9.

Local officials call Young highhanded, or worse.

“He’s vindictive and mean-spirited,” state Representative John Rogers, a Birmingham Democrat, said at a Nov. 14 hearing.

“It’s better for the county for John Young to leave,” County Commission President David Carrington, a Republican, said at a public meeting Nov. 15.

Delegation’s Vote

The county’s legislative delegation, typically divided, voted unanimously in favor of a resolution asking for Young’s removal yesterday.

With the county in bankruptcy, “there’s no reason to have the receiver in place,” said state Representative Paul DeMarco, the Republican head of the delegation. “To spend millions of dollars for that makes no sense.”

Young said yesterday he was taken aback at the commission’s decision to seek bankruptcy protection.

“We came up with a solution that was good for all parties,” he said. “I was really surprised we couldn’t get it over the finish line, not only surprised but very disappointed.”

The county holds that the Chapter 9 filing stops Young’s authority. Young disputes that. In hearings scheduled Nov. 21 and Nov. 22, Bennett will weigh claims from both sides.

Utility Executive

Young was chief operating officer at American Water Works Co., a Voorhees, New Jersey, utility with 16 million customers in 32 U.S. states and Canada, when he got a call from a Birmingham lawyer asking him to come to Alabama.

In his Atlanta presentation, and one in New York yesterday, Young said the sewer system was a mess when he arrived.

Saying that New York bankers enabled too much debt and risky financing, he said corruption among some former politicians and incompetence were the real culprits. Taking advantage of a federal order to repair the crumbling system, county officials went on a spending spree with their friends and with no budget or plan, Young said.

Five former commissioners were convicted of or pleaded guilty to corruption charges in connection with the project.

Young showed slides of a $52 million treatment plant sited so poorly that it filled with groundwater and needed $36 million to repair, and a “tunnel to nowhere” that stops halfway under the Cahaba River.

“They had a tendency to just make projects up,” he said.

Fee Increase

Sewer fees rose 329 percent from 1997 to 2008 and haven’t increased since. With bills mounting, officials “went to the New York municipal-bond market and said ‘How can you help us get creative, so that we can spend more money without raising rates?’”

The system was still mismanaged last year, according to Young: On his first day, he asked for income, cash-flow and balance-sheet statements and “they looked at me like I was from Mars,” he said. In some areas, nine workers were doing jobs normally done by two, he said.

Young said in New York it’s “naive” to think that Jefferson County can manage its system and comply with a 1996 order to fix the system without making customers pay more.

The system needs $30 million to $35 million annually for new pipes, he said. It spent $7 million last year. The lack of mandatory hookups for new development exacerbates the system’s revenue difficulties, Young said.

He said he expects to prevail in court and stay on as receiver. He said his pay rate was set by the judge who appointed him, and that he earns it.

“It’s a pretty difficult job,” Young said.

To contact the reporters on this story: Margaret Newkirk in Atlanta at mnewkirk@bloomberg.net; David Beasley in Atlanta at dbeasley3@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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