The terms of the agreement call for Jefferson County, which includes the city of Birmingham, to shed about $1 billion of the debt, the majority of which is held by JPMorgan Chase. The agreement also offers the county several tools to lower the interest rate on roughly $2 billion of new, 40-year debt that will be issued to replace the current warrants.
“It’s been an agonizing process; it’s been going on for three and a half years,” said one Jefferson County commissioner, Joe Knight, explaining why he voted for the agreement. “Today we’re going to take a step. It’s time for a resolution of this lingering debacle.”
Even with the Jefferson County Commission’s 4-to-1 vote in favor of the agreement, a number of significant steps must still be taken by the state Legislature and other parties before the restructuring can close by the deadline of June 30, 2012. The county’s other creditors — including Bank of America, Bank of New York Mellon, Regions Bank, Assured Guaranty and Financial Guaranty Insurance — have agreed to use the new agreement as a framework for completing a definitive settlement with the county.
Jefferson County’s outsize debt grew out of a flawed attempt to refinance bonds that it sold in the 1990s to raise money for court-ordered improvements to its sewer system. The refinancing was supposed to save money, but it set off a wave of influence-peddling and other illegal activity that led officials to sign up for complex derivatives contracts fraught with hidden risks. The contracts broke down when the markets froze in 2008, leaving the county with more debt than it could pay. Several officials have since been convicted on corruption charges.
The county defaulted on the debt in 2008 and has since been in acrimonious and mostly unproductive talks with creditors about what to do next. The creditors have called on the county to raise sewer rates, but many residents have said they should not have to pay more because contracts were signed amid so much lawbreaking.
The new agreement calls for yearly rate increases, but smaller ones than creditors proposed in the past. It also calls for outside consultants to vet the sewer system’s expenditures and costs, for a low-income assistance fund to be created at creditor expense, and for the county to catch up on its audited financial statements, which have been late ever since 2008.
Mr. Knight and others on the five-member commission said they decided to approve the deal because it would involve the state’s help for the first time. Gov. Robert Bentley is to call a special session of the state Legislature this fall, where lawmakers will be asked to work on several forms of assistance.
First, the legislators are to create an independent public corporation to take the troubled sewer system off Jefferson County’s hands. Because Jefferson County is now in default on the existing sewer debt, it cannot issue new debt, which is an essential part of the planned restructuring. The new corporation would be able to issue the debt separately from the county, with a clean balance sheet.
The legislators will also be asked to draft a “moral obligation covenant” for the corporation, meaning state money could be appropriated, upon approval, if the corporation fell behind on its debt payments. Although this covenant would not be as secure as a state guarantee, it would add a layer of credibility to help reduce the new corporation’s borrowing costs.
In addition, state lawmakers are expected to look for ways to help Jefferson County close a $40 million budget gap that became apparent over the summer.
Until this year, state officials refused to help the county straighten out its finances, saying it had made its own problems and should solve them on its own. That led to a hardening of public opinion in the county, with more and more people calling for the commission to declare bankruptcy.
County Commissioner Sandra Little Brown said that since the state had finally offered some help, “it would really be a slap in the face to the governor and the Legislature” to turn it down. She pointed out that the framework agreement still gives the county a chance to file for Chapter 9 bankruptcy court protection if the state’s efforts prove fruitless.
The one commissioner to vote against the agreement, George F. Bowman, said he did so mainly because it included rate increases.
In the meeting on Friday, he read part of a letter the commissioners had received from a county resident who urged them “not to accept the extraordinarily damaging terms,” particularly annual rate increases that could go on for as long as 40 years.
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