Birmingham Blues

Let me start with a caveat: the Jefferson County sewer bond debacle, and the competing proposals to fix it, are way too complex for a blog post. I’m not going to try to explain the mess in great detail, in part because I’m no expert in financial instruments and in part because it might make my head explode.

Suffice it to say that borrowing a buttload of money, switching fixed rate for variable rate debt, and authorizing a bunch of interest rate swaps have left the county facing bankruptcy and quite a few bankers, attorneys, and advisors with $100 million of our money lining their pockets. For some good background written in layman’s terms, see this New York Times article from March that was co-authored by the Birmingham Weekly’s Kyle Whitmire. Something not noted therein is a breakdown of the current $3.2 billion in debt:

• $2.2 billion for sewer repair, construction, and expansion *
• $312 million to refinance old sewer bonds
• $310 million in reserves for investments, future projects, and emergencies
• $273 million for escrow on refinanced bonds
• the aforementioned $100 million for bond insurance and professional fees paid to investment banks, attorneys and other advisors (OUCH!)

* The $2.2 billion includes:

• $1.5 billion to comply with a 1996 agreement between the county, the Cahaba River Society, and the Justice Department
• $503 million to comply with Clean Water Act violations discovered subsequent to the 1996 agreement
• $237 million to expand the system and boost capacity beyond 1996 levels (this number tends to get disappeared in the analysis, particularly by people who want to blame the Feds and those evil environmentalists for the whole mess)
• $22 million for additional operating and maintenance expense

Take a deep breath and plunge into the muck. What’s that? You thought you already had? It only gets deeper and nastier from here.

Last week, the County Commission avoided forced bankruptcy with a $44 million forbearance payment, its fourth since March. Three County Commissioners, Bettye Fine Collins, Shelia Smoot, and George Bowman, have endorsed a plan conceived by Citigroup that would replace $1.4 billion in existing sewer warrants and $1 billion in existing school warrants with $4.8 billion in new 40-year fixed-rate bonds. Yeah, I know those numbers don’t exactly add up, but the $4.8 billion includes money for “planned capital projects and ongoing system maintenance”. The other two, Jim Carns and Bobby Humphryes, believe the county should file for Chapter 9 bankruptcy (Carns seems to believe that the sewer system alone could declare bankruptcy).

Yesterday, various bigwigs gathered at the Wright Fine Arts Center on the campus of Samford University to hold what was initially billed as a public hearing but was actually a dog and pony show for the Citigroup plan, which is very similar to a plan proposed by local attorney Bill Slaughter. The public was invited but not permitted to speak, only to submit written questions. Gov. Albert Brewer served as moderator for a panel that included Jeff Sewell, a county attorney; Scott Williams, a bankruptcy attorney with Haskell Slaughter Young & Rediker; Guy Logan of Citigroup Global Markets; Frank McPhillips, a public finance attorney; and Charlie Wagner, another county attorney.

Gov. Brewer did an excellent job of balancing the need to keep order with what appeared to be his own desire to hold the panelists’ feet to the fire when it came to answering questions. OTOH, it’s ridiculous that a 74-year-old man was escorted from the premises for holding a sign and expressing his displeasure to Bill Slaughter. Slaughter’s comments regarding those who disagree with the Citigroup plan have been intemperate, to say the least, but no one has sent the police to shut him up.

The presentation opened with Jeff Sewell giving a disclaimer that the information we received was not to be used for investment decisions. As if anyone in the room would want to buy JeffCo bonds at this point. He also said the county has three options at this point — voluntary bankruptcy, receivership, or the Citigroup plan.

Mr. Sewell was followed by Scott Williams, who gave a primer on municipal bankruptcies, which are governed by Chapter 9 of the bankruptcy code. Basically, while state law authorizes a municipality to declare bankruptcy, the process is overseen by a federal judge. He said that the sewer system is an asset of the county rather than a separate entity; therefore, any bankruptcy filing would include the entire county, not just the sewer system. The court cannot force the county to sell off assets, and only the county can propose a reorganization plan, which must be approved by a majority of creditors.

If the county did sell the sewer system, it would go to the highest bidder and would include all associated debt. That means the new owner would still be liable to bondholders and would simply raise sewer rates, which have already increased 329% since 1996, to the level necessary to fund repayment. The public would have no recourse, as the Alabama Public Service Commission does not regulate sewer rates. He also said it’s not clear that Alabama’s constitution gives the county the authority to sell the sewer system.

Receivership, or involuntary bankruptcy, would mean the court would appoint an individual whose sole authority would be to raise rates and bring lawsuits in order to pay off creditors.

Have your eyeballs shorted out yet? It’s okay; take a break and let the synapses rest a bit.

Oh, you’re back already? Onward, then…

Here are the basics of the Citigroup plan as it was outlined yesterday:

1. The county would issue new warrants of $1.9 billion that would retire $1 billion in existing school warrants and $663 million in existing sewer warrants. The new warrants would be secured by an existing school sales tax. The plan assumes that revenues from the current tax will increase 3% annually. If tax revenues fail to meet the principal and interest due, the rate would be increased to cover the shortfall, with a cap of 0.5%. THIS PORTION OF THE PLAN REQUIRES A CHANGE IN THE LAW to permit the school sales tax revenues to be used to pay sewer debt.

2. The county would issue new warrants of $806 million that would retire $719 million in existing sewer warrants. The new warrants would be secured by an existing occupational tax, but in order to raise sufficient revenue, current exemptions for certain professionals WOULD HAVE TO BE REPEALED. $38 million in principal and interest would be paid from:

• $10 million raised from repeal of occupational tax exemptions
• $10 million diverted from an expiring commitment to the Birmingham-Jefferson County Civic Center
• $18 million from “fair and uniform applications” of business license tax (those “fair and uniform applications” were not detailed)

Again, the plan assumes a 3% annual increase in occupational tax revenues.

3. The county would issue new warrants of $2.1 billion secured by sewer system revenues that would pay for planned capital projects and system maintenance. Failure of sewer revenues to cover debt service would trigger either:

• automatic ad valorem tax increases (THIS WOULD REQUIRE LEGISLATION)
• no sewer rate increases through 2012, with increases of 2% annually thereafter for the term of the bond

or

• no sewer rate increases through 2012, with increases of 4% annually thereafter for the term of the bond

Problems? You betcha.

The biggest one, clearly, is the need for legislative and voter approval for this plan — approval that must be obtained in very short order. As in, the Governor would have to agree to call a special session next week, and he’s already indicated that he’s not interested unless the plan has unanimous support from the Jefferson County delegation, which it doesn’t. Local legislators I’ve spoken with are disappointed that the county waited so long to address the problem and essentially dropped this package in their laps last weekend without asking for any input. They agree that something must be done, but they are leery of any plan that includes automatic tax increases. And rightly so. I can’t imagine the voters of this state approving any amendment that includes the words “tax” and “increase” in the same sentence. Or even paragraph.

And, given the crowd reaction I observed yesterday, the citizens of Jefferson County, or at least those who are paying attention, do not support the Citigroup plan. They see it as gouging the taxpayers while letting the people responsible for this fiasco off the hook. They think bankruptcy is the way to go, and they don’t believe it would result in huge sewer rate increases.

“Nobody anywhere in the country is going to come in and triple rates in Jefferson County,” [Commissioner Jim Carns] said. “Forty percent of ratepayers in Jefferson County fall in the EPA guidelines of no more than 2 percent of your family income should be paid for sewer.”

I’ve heard this affordability standard invoked by others, but I’ve yet to find an official cite. This EPA publication does note that pollution control costs that exceed 2% of median household income “may place an unreasonable financial burden on many of the households within the community”. I’ll keep looking, and if anyone has a link to the relevant statute or regulation, please leave it in comments.

Finally, even if everyone were all ready to jump aboard this train, I’d have to question the assumptions behind the plan’s revenue projections. Three percent annual growth in sales and occupational tax collections over the next 40 years? Not if this trend continues. Jefferson County’s population is decreasing, with the fastest decline coming in the family-age group (ages 5-44). That doesn’t bode well for tax or sewer revenues.

If you’re still with me at this point, please note that I don’t see any good options for the county. Even if the Citigroup plan were perfect, and it isn’t, it’s almost inconceivable that it would be approved before the next drop-dead date. The Commissioners are squabbling among themselves rather than working together. They’ve managed to alienate the legislators who could help them and the citizens who will be voting in the next county election. Bankruptcy, which seems almost unavoidable at this point, would leave a long-term blot on the county’s record and probably damage credit ratings across the state.

I wish there was a brilliant solution out there somewhere, but it’s probably too late to find it.

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If you attended any of the meetings that were held on Thursday and Friday, please feel free to post your accounts in comments. Or, if they are really long and detailed, I’ll be happy to entertain guest posts. Same for those of you with technical expertise who can expand on my post and clear up any confusion over details. This is important information, and we as citizens need to know it.

This entry was posted on Saturday, August 9th, 2008 at 3:33 pm and is filed under Local Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.