BRADENTON, Fla. — Jefferson County, Ala., on Tuesday hired a national bankruptcy law firm to help determine whether to proceed with the largest Chapter 9 filing ever in the United States.
County commissioners engaged Klee, Tuchin, Bogdanoff & Stern LLP as legal counsel and planned Thursday to discuss strategies, including filing for bankruptcy, Many of the firm’s attorneys worked on the bankruptcy of Orange County, Calif., in 1994.
Jefferson long ago hired a local firm as a bankruptcy expert and participant in negotiations with creditors on its $3.14 billion of troubled variable- and auction-rate sewer warrants, on which the county has defaulted.
Adding Klee Tuchin to the team could mean that Jefferson County is considering Chapter 9 “very seriously,” said Sean Scott, a partner and bankruptcy attorney at Chicago-based Mayer Brown LLP, a multifaceted law firm with a municipal finance practice.
“It signals to me, and probably to the county’s bondholders as well, that Chapter 9 is a very real possibility at this point in time,” Scott said.
Three weeks ago, Jefferson County submitted an offer to restructure the sewer warrants if creditors would agree to take a haircut of $1.3 billion, according to published reports. The county also wants creditors to agree to single-digit annual rate increases for sewer system customers over several years.
In return, the county said it would support the creation of a Government Utility Services Corp. to refinance the sewer debt and operate the sewer system. That plan would have to be accomplished through an act of the Alabama Legislature.
Creditors reportedly have submitted a counteroffer. The largest debt holder, JPMorgan, was not immediately available for comment. County officials also could not be reached for comment.
The five-member sitting commission was elected in November and several members repeatedly have said they are determined to deal with the sewer debt problem, even if it means filing for bankruptcy. The board also has commissioned audits for the county, which have not been done for the last three years. Only the 2008 audit has been released so far.
A key element of qualifying for municipal bankruptcy is insolvency, according to Scott.
If the county files, the bankruptcy court will have to determine if it is insolvent. That would require a finding that the county is not generally paying its debts, or will be unable to do so in the near future, he said.
Scott believes the court may do a cash-flow analysis to determine if the county will be unable to meet its payment obligations going forward.
“In Jefferson County, the sewer revenue bonds are one thing the court will take into account,” he said. “I’ve also seen reports in the media that the county has general obligation bonds that it might not have sufficient cash flow going forward to pay, and if that’s the case, a court might consider such a deficit in their general fund sufficient to render the county insolvent for bankruptcy purposes.”
In addition to the defaulted sewer warrants, the county has $105 million of variable-rate GO debt on which it also has defaulted. That debt is subject to accelerated payments.
The county also has $935 million of other long-term debt outstanding.
If Jefferson County is found to be insolvent and has not reached agreement with a majority of impaired creditors, it must show that it has negotiated with them in good faith or was unable to do so because negotiations were impracticable, Scott said.
Negotiations to restructure the sewer warrants have taken place since early 2008 and the county has sought to repudiate various amounts of the debt. Some people believe that such a large bankruptcy would have a major impact on the bond market as well as Alabama issuers.
“The situation has been so long in coming, so well-telegraphed, that it can’t be a surprise to anyone,” said Matt Fabian, managing director at Municipal Market Advisors. “It’s hard to see it scaring the market. On the other hand, the state has done so little to help the county remediate its problems that [investors] should be careful buying Alabama paper.”
Fabian believes it could be a long time before the county can access the bond market again.
“It may be a decade or more before market acceptance of the county improves, depending on how they manage their finances going forward,” he said. “But if they could restructure without impairing bondholders, it could be faster. If they decide to actually file [for bankruptcy] and pursue repudiation, it will take longer.”
Complicating the county’s efforts is its rocky relationship with state legislators who failed to support a previous settlement attempt that required adding a new funding source to pay off the negotiated amount of sewer debt.
The county does not have home-rule power, so state lawmakers must approve new revenue sources and tax hikes.
The latest settlement offer from the county reportedly does not require a new revenue source. It would require the Legislature’s approval to create the public benefits corporation to take over the sewer system.
Members of the local legislative delegation have expressed their support for creating a board to run the sewer system, said Sen. Slade Blackwell, a Republican from Mountain Brook, a city in southeastern Jefferson County and a suburb of Birmingham, the county seat.
“In concept, everybody’s positive about having an independent board that will run the sewer system,” he said, noting that an ultimate goal would be to remove the politics and corruption that have enveloped the construction and financing of the system.
Though Blackwell said he is not privy to negotiations between the county and creditors, he is hopeful that a settlement can be reached now that Gov. Robert Bentley and the state finance director are assisting the county in talks.
“I’m against bankruptcy,” Blackwell said. “I think the long-term effects are going to range from having a stigma over Alabama bringing in new economic development projects to attracting business from overseas to Alabama, and I think it’s going to stifle our growth and our employment.”
When Jefferson County has the ability to sell bonds, it will be penalized with higher rates, he said, adding: “It’s a rolling effect that just doesn’t stop for a long time.”
In addition to the troubled sewer debt, the county is dealing with the loss earlier this year of a legislatively approved occupational tax struck down by Alabama’s courts. The job tax revenue provided $63 million for the county’s general fund in 2010.
Commissioners are continuing to search for budget cuts and have laid off 500 employees.
Meanwhile, the commission is nearing the end of a 30-day standstill period to continue negotiations with creditors. An extension of the standstill period is being discussed this week.
“I finally think that we’re moving forward, actually talking and trying to work something out that was stalled for a long time, and there’s been quite a bit of movement in last 30 days,” Blackwell said. “Is 30 days enough to solve this whole thing, and is an extension in cards? I don’t know.”
