Jefferson County Debt Deal May Let Bankruptcy Case Return

(Corrects new debt number in second, 16th and 25th paragraphs of story published Nov. 22.)

To shed more than $1.4 billion in debt, Jefferson County, Alabama agreed to give up some of its power to set future sewer rates, a compromise that means the second-biggest U.S. municipal bankruptcy might be brought back to life decades from now.

U.S. Bankruptcy Judge Thomas Bennett yesterday approved the county’s debt-adjustment plan, which was built on a settlement with JPMorgan Chase & Co. (JPM) and other creditors. That deal requires the bankruptcy court to retain authority over the county until almost $1.8 billion in new sewer debt is paid off in 40 years.

“Obviously, Judge Bennett’s not going to be around for 40 years,” R. Dale Ginter, a bankruptcy lawyer at Downey Brand LLP in Sacramento, California, said in an interview. “Somebody that is in high school today, in 25 years may be ruling on the case.”

The unusual agreement will allow a trustee for warrant holders to seek authority, after the bankruptcy case becomes inactive, to force any sewer rate increases that may be needed to pay the debt.

In his ruling yesterday, Bennett, 64, found that was unlikely to occur within 10 years. After that, sewer rates may not raise enough money to fully fund all of the needed sewage system upgrades, he said.

After the judge’s ruling yesterday, the county’s 5.25 percent warrants that mature in 2048 rose 2.7 percent to 99.5 cents on the dollar, according to data compiled by Bloomberg.

Taking Power

“The concern raised by any long-term, ongoing involvement by the bankruptcy court, is that it continues taking away local government power from local officials,” said attorney Sharon Levine of Lowenstein Sandler PC, who represents one of the biggest unions in the bankruptcy case of Detroit.

Municipal debt experts are split over whether Jefferson County’s success will encourage other cities or counties to cut debt using the U.S. Bankruptcy Code’s Chapter 9, which covers municipalities.

“It’s costly for everybody,” said Bart Mosley, co-president of Trident Municipal Research in New York. “Creditors have to actively pursue better solutions before it gets that far.”

As creditors understand they face writedowns and municipal officials weigh the costs and burdens, they’ll work harder to strike deals out of court.

‘Unrealistic Burden’

When there isn’t enough money, bankruptcy may become an option, said Richard Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell Investment Management, which oversees about $8 billion of municipal bonds.

“Jefferson County and Detroit could make it possible to see more of these situations occur, especially where there’s an unrealistic burden of liabilities and a contracted economic base,” Ciccarone said.

Ginter said politics may push elected officials to choose bankruptcy.

“Politicians would rather have cities and counties go into bankruptcy than make hard decisions and then face voters,” he said.

Jefferson County reached a settlement with JPMorgan and other creditors after battling in court for 20 months. The creditors agreed to take less than about $3 billion they were owed. A rise in interest rates forced more concessions, which were announced last month. The plan also imposes several years’ worth of rate increases on sewer users.

New Financing

After Bennett issues a written ruling, the county can close on about $1.8 billion in new financing on Dec. 3 that will be used to pay creditors. With the closing, the active part of the case will end, leaving only minor legal issues to be addressed, Patrick Darby, an attorney for the county, said in an interview.

Within minutes of Bennett’s decision, protesters opposed to the sewer rate increases were outside the courtroom heckling County Commission President David Carrington, who led the voting bloc that backed the bankruptcy.

“You’re a crook,” Charles Hicks, a Birmingham resident, said to Carrington during a brief shouting match.

The case can be traced to an aging sewage system that federal regulators ordered fixed in the 1990s. To pay for the repairs, Jefferson County began borrowing money and refinancing old debt, issuing more than $3 billion in warrants and interest-rate swaps by 2003.

Corruption Charges

Local elected officials accepted bribes from construction contractors and financial advisers seeking business with the county. By 2010, 21 people, including four county commissioners, had been convicted of corruption-related charges, according to Peggy Sanford, a spokeswoman for the U.S. Attorney’s Office in Birmingham.

In 2009, JPMorgan signed a $722 million settlement with the U.S. Securities and Exchange Commission for its role in helping arrange the sewer debt.

Since filing the $4.2 billion case in November 2011, the county has spent more than $24 million on attorneys and other advisers. Bennett yesterday called the tally “reasonable” considering the litigation involved.

The judge rejected final arguments against the exit plan, which is built on the June settlement with JPMorgan and other creditors. After that agreement was arranged, the only organized opposition came from two sets of lawyers fighting to save the lawsuits they filed against the New York-based bank on behalf of sewer ratepayers.

Rate Increases

They told the judge that the rate increases needed to implement the settlement were too high for residents to afford. With plan approval, their lawsuits, which are now on hold, will end.

Rejecting the plan would have blown up the settlement with creditors, because the county had agreed to halt the lawsuits in return for a reduction in principal on the $3 billion in sewer debt. Under the settlement, the sewer debt will drop to $1.79 billion, according to court documents.

Calvin B. Grigsby, one of the attorneys suing JPMorgan, said he plans to appeal Bennett’s decision.

Grigsby said he spent “a couple hundred thousand” dollars fighting the bankruptcy. One of his supporters, Birmingham City Councilwoman Sheila Tyson, said she would try to persuade the city to help fund Grigsby’s planned appeal.

The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

To contact the reporter on this story: Steven Church in federal bankruptcy court in Birmingham, Alabama, at schurch3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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