Bronner Presentation to Area Elected Officials
I had the opportunity to attend Sen. Jabo Waggoner’s monthly gathering of area elected officials this morning. Dr. David Bronner, CEO of the Retirement Systems of Alabama, spoke about JeffCo’s sewer debt debacle and his proposal to rescue the county from the mess.
First, just in case Sen. Waggoner reads my blog, I want to thank him for the invitation. It is so much easier to gather information directly from the source than try to sort through what is reported in the media. There’s only so much space to devote to this story, and a complete transcript isn’t going to make it into the Birmingham News. This was valuable information for my work, and it’s good to feel like an informed citizen as well.
Dr. Bronner’s speech addressed seven points:
1. Is there a problem? Clearly, the answer to that one is “duh”. He didn’t go the route of the County Commission and try to blame it on the Clean Water Act; he said flat out that we have too much debt, too much variable rate debt, and too much mismanagement and corruption. He mentioned the twenty-one individuals and businesses that have already been convicted or taken a plea and said he expects there will be more to come. I expect he’s right. The grand jury investigating the county’s financial business and Larry Langford’s involvement in the bond deals heard from quite a few people this week, including Commission President Bettye Fine Collins, Commissioner Shelia Smoot, former Commissioners Mary Buckelew and Steve Small, former finance director Steve Sayler, and attorneys Bill Slaughter and Charlie Waldrep, whose firms handled the bond deals for the county.
2. Bronner said that neither he nor Gov. Riley wants to see the county forced into bankruptcy. Riley wants a hybrid plan that would force “JP Morgan, bond issuers and consultants” to share the pain. Riley doesn’t want the taxpayers to foot the bill.
3. If an asset is worth only a fraction of the debt incurred, the owner must either surrender it to the lenders or substantially reduce the debt. He used the example of a house with a $100,000 mortgage that is only worth $33,000 and said it would be pointless to continue to struggle to make payments on the full amount of the debt.
4. He disputed Alabama Power President Charles McCrary, who said on Tuesday that bankruptcy would brand the region with a “scarlet letter” and harm economic development. Bronner called it a scarlet A, which got me thinking. Wouldn’t it be a scarlet B, for Bankruptcy, or a scarlet D, for Deadbeat? But I digress. He thinks bankruptcy is justified in our situation because it will protect the taxpayers who “don’t deserve the abuse” of paying for corruption. He doesn’t believe it will do any lasting harm, and he cited Orange County’s ability to borrow over $200 million while in Chapter 9. I’d say the last thing JeffCo needs to do at this point is borrow more money, but it will need to eventually.
5. He said a bankruptcy filing would be old news in 72 hours. Really? The biggest municipal bankruptcy in history, twice as big as that of Orange County? The public does have a short attention span, so he may have a point. He called Chapter 9 the “best and most misunderstood gift” from the federal government to municipalities after the Great Depression because it offers protection from creditors while allowing them to continue to operate without the restrictions imposed in other types of bankruptcy. He said a filing would stay the county’s obligations so as to stop the accumulation of interest and penalties and give the county unlimited time to provide a repayment plan, and once the judge agreed the plan was reasonable that would be the end of it. More on that last part at the end of the post.
6. He stated that the Commission should, as its primary plan, vote to authorize a bankruptcy filing. That action would, he hoped, force the “money train folks” to come to the table and accept a negotiated settlement that would share the pain. He pointed out that Orange County collected $400 million from Merrill Lynch after its $1.6 billion bankruptcy in 1994 and said that would be “chump change” for this “$3.2 billion scam”.
As a backup plan, the county would go forward with its Chapter 9 filing, and RSA would purchase the sewer system for a price calculated to allow for a specific return to its investors based on projected revenues. He built in a small cushion that could go to reserves but would preferably be used to reduce rates. At the end of a specified period of time, the county would have the option to buy back the system for the original purchase price.
7. He summed up three options:
a. put more debt and tax money into a system that can’t meet its current debt service
b. authorize a Chapter 9 filing and see if there is a rush to settle
c. if no immediate resolution, file and let “money train folks meet their Maker” in Chapter 9.
At that point, he took questions from the elected officials. Rep. Mary Moore (D-JeffCo) pointed out that the majority of sewer customers live in lower-income commission districts and asked for clarification on how bankruptcy would affect sewer rates. Dr. Bronner was incredibly rude in his response, telling her she should have been listening and, when she insisted on an answer, telling her to sit down. He later apologized to her.
There was a good bit of grandstanding from commission members and others who support bankruptcy, but there were also some excellent questions that might have been obvious to Bronner but have been a source of great confusion for those who are following this saga and trying to make sense of it. Rep. Scott Beason (R-Gardendale) asked how we could guarantee that RSA would be the purchaser if the sewer system were put up for sale. Bronner said that could be included in the county’s restructure plan. This flatly contradicts what I have been told elsewhere, that the county would have to auction any assets sold to the highest bidder, but I haven’t been able to find confirmation one way or the other. (I did find this article that discusses the pending negotiated sale of a hospital by Valley Health Systems, a public entity that has filed Chapter 9 bankruptcy. The article notes that the sale must be reviewed by the bankruptcy court.)
Commissioner George Bowman, who opposes bankruptcy, asked the question that Bettye Fine Collins has posed: why won’t the RSA buy the sewer system without a bankruptcy filing? Of course, it’s because the system isn’t worth $3.2 billion, but I still think it’s good to have that stated clearly.
Commissioner Jim Carns, who supports bankruptcy, stated that the sewer’s annual debt service is currently $460 million, while annual revenues are only $190 million. He said the county needs to act now rather than take a poll in November.
Rep. Moore asked if the sale to RSA would include an agreement that there would be no re-sale to another entity before the county has the option to repurchase. She also called Bronner quite nicely on his earlier rudeness, and that’s when he apologized. His response to her question was, as best I could make out “I can do that.”
Rep. Rod Scott (D-JeffCo) pointed out the difference in demographics between Jefferson County and Orange County, which is one of the wealthiest in the US. He also quoted from a Public Policy Institute of California study (also mentioned at last week’s public forum) that projected the impact of the Orange County bankruptcy on other municipalities and the state of California to be up to $200 million a year in additional borrowing costs and asked if Alabama would suffer a similar penalty.
Rep. Jack Williams (R-Vestavia Hills) asked if Bronner could speculate as to the outcome of negotiations, but Bronner said there is no way to predict. JP Morgan owns $2 billion of the outstanding debt, four other banks $1 billion, and small investors the remaining $200 million.
Commissioner Bowman asked if all the municipalities in the county would have to agree to a sale of the sewer system, and Bronner replied that he doesn’t know. Seems like that would be an important piece of information. Commissioner Humphryes assured us all that it’s not necessary, but I think I’ll wait for second opinion on that.
Sen. Linda Coleman (D-JeffCo) closed out the Q&A by asking where we go from here. Those of you who are Buffy fans will know why I immediately started singing under my breath. Bronner replied that implementing his plan requires nothing more than three votes on the county commission.
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Okay, that was really long, and I’m grateful to those of you who stuck it out this far. While I’m aware that the Birmingham News and the TV stations can condense this down into a few sound bites, I can’t. And I don’t really think I should.
I came away with some remaining questions. The primary one is whether or not bankruptcy will have a negative impact on the state as a whole. I’m talking real economic impact, like increased borrowing costs across the board and loss of good development opportunities. I don’t know the answer, and neither does anyone else. A municipal bankruptcy of this size is unprecedented. Second, if the county files Chapter 9 and submits a restructure plan, does at least a majority of creditors have to approve it before it is implemented? Bronner stated repeatedly today that creditors have no say whatsoever, but that assertion certainly appears to be contradicted by a CRS Report for Congress dated March 8, 2007, which says the following:
Reduced to its bare essential, debt adjustment under chapter 9 simply requires the debtor and its creditors to reach some agreement on an acceptable reorganization plan. The municipality need not actually negotiate the plan with its creditors; it may file a debt adjustment plan or modifications to the plan unilaterally. But the plan must ultimately be approved by creditors in order to become effective. If consensus is reached, the court reviews the plan to determine that it “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted the plan.”
Finally, I’d like clarification that the county is free under state and local law to sell the sewer system and that the county can indeed include the sale of the sewer system to the RSA as part of its restructure plan.
Ultimately, my opinion likely matter in the slightest when it comes down to a decision. But I still believe that it’s my responsibility as a citizen to get the best information I can — and pass it on to you. I report; you decide.
August 15th, 2008 at 2:15 pm
Commissioner Bowman made an interesting comment after the meeting. He said that the “first team” that was working on the finance plan included a bankruptcy lawyer. He said that at the time they were threatening bankruptcy, that it was “on the table.” He said that it made no difference in the end. He then said that passing a resolution “authorizing” Chapter 9 as a way to bring people back to the table was “playing chicken with an elephant.”
I think he has an interesting point, that in reality we might have already tried the bankruptcy threat, and it was us who blinked. Bowman is still against bankruptcy, but it seems clear that only actual filing will bring results.
August 15th, 2008 at 6:14 pm
Great job!
A few points:
1.Neither the Alabama Constitution nor the Code specifically states that a County can sell something like a sewer system to a private entity. A County is granted all of the powers of a corporation, however, and a corporation can legally sell its assets to whomever it please.
The Jefferson County Commission’s current legal team does question, apparently, whether the delegation of general corporate powers to a County actually includes the power to sell County assets. While the answer seems fairly obvious, it is a point of dispute that could require resolution by a court.
If presented to a court, the Judge would likely try to discern if the legislature intended to grant a County the ability to sell its assets and would look to other portions of Alabama law for guidance. Chapter 88 and Chapter 89 of Title 11, for example, make it clear that a County may transfer, sell, or give a sewer system to either an Authority or a District. Both an Authority and a District are political subdivisions of the State, so a Court could infer that transfer of the sewer system to another political subdivision of the state, like the RSA, is within the legislative intent.
Bottom-line, it seems likely that the County can sell the sewer system.
2. Because Chapter 9 delegates the vast majority of decision-making to the debtor, Jefferson County will have a strong argument that it can nix the sale of the sewer system to any entity that it views as “bad for taxpayers.” Because of 10th amendment concerns, a Bankruptcy Judge will think twice before authorizing the sell of the sewer system to any entity over the objection of the Commission.
3. A plan can be approved by the bankruptcy court even if the majority of creditors are against the plan - so long as one creditor, of the same class as the objecting creditors, supports the confirmation of the plan.
August 15th, 2008 at 8:44 pm
Thanks, Lisa and Jim. I can’t get excited about bankruptcy, but it does appear to be inevitable at this point.
August 16th, 2008 at 10:24 am
I’m tending to agree. Filing for bankruptcy protection would be a huge disaster, but not nearly as huge or disastrous as NOT filing for bankruptcy. We don’t have any good choices, so the best one is the one that’s not as terrible.
August 17th, 2008 at 1:59 pm
Bankruptcy is the only answer for Jefferson County at this point because defaulting on the bonds would have a much worse outcome for the taxpayers. This is primary reason why that Jefferson County needs an administrative branch that is totally independent of politics.
August 18th, 2008 at 8:40 am
“The public does have a short attention span….” Filing for bankruptcy will become completely irrelevant when the next racy pictures of Britney Spears pop up! Bankruptcy Shmankruptcy!!!!!!! Is Lindsay Lohan still kissing on that girl??? Now that’s REAL NEWS!!!
August 18th, 2008 at 9:16 am
Jennifer, come on! You’re supposed to make me laugh, not hang my head in shame.
August 19th, 2008 at 12:23 pm
Here’s an investor’s perspective.
There is a huge difference between default and bankruptcy.
Orange County did not really default. It restructured terms on some short-term notes with institutions. Then it sued the dealers that got them into the mess. Orange County was able to borrow shortly thereafter, but debt had to be secured by a sales-tax pledge. (same as NY City and other muni borrowers when in crisis).
Bottom line (in my opinion)- the market will understand if bankruptcy is used by Jefferson County to fix flawed capital structure. The market expects the County to extract a significant settlement from bankers. The market, however, will not like a bankruptcy that results in default on the scale suggested by Bronner. That would cost Alabama municipalities for many, many years.