Six weeks ago, the Jefferson County Commission sent Wall Street a term sheet for a settlement. The court-appointed receiver of the county’s sewer system congratulated the county for its hard work reaching an acceptable deal with its creditors. All that was left was for the creditors to sign on the dotted line.
Instead, creditors pelted the county with counter offers. The complexity of a possible settlement seemed to feed on itself, growing as it went. By Monday, the county was being pelted with counter offers it found unacceptable, and in the last 48 hours, the party’s moved so far apart, a deal became impossible.
The commission chose the only option it had left: The largest municipal bankruptcy filing in the history of the United States.
“Sometimes bankruptcy is a measure of last resort, and in my mind, we’ve reached that last resort,” Commissioner Joe Knight said.
The county’s lead bankruptcy lawyer, Kenneth Klee, said the creditors have left the commission with no other choice.
“The creditors have not signed an agreement,” Klee said after the commission meeting. “The form of the agreement changed last night and the commission decided that it had had enough. It was time to take the next step.”
Commissioners agonized over the decision, one which many observers felt was as obvious as it was inevitable. Regardless, commissioners said they would have to prove to a federal bankruptcy judge that all options had been exhausted. By Wednesday afternoon, the commission had reached that point of exhaustion.
In its September proposal, the commission had sought $30 million of additional concessions from creditors. It was a gap they thought some of the smaller creditors could close. Instead, that gap grew, and by Monday the difference between the county and Wall Street’s proposals had grown to $140 million. About $69 million of that came from a swap transaction with Lehman Brothers, the defunct Wall Street bank. With nothing to gain from a write-down and nothing to lose by calling its chips, Lehman Brothers refused to concede its stake in Jefferson County debt.
Regions bank had agreed to $11 million of concessions, county officials said, but the bank recently sold its county debt holdings, rendering that agreement worthless.
Meanwhile, creditors asked for bigger sewer rate hikes. While the negotiated sewer rate hikes for residential customers remained constant, other rates, such as commercial rates and fees for grease traps, were set to skyrocket, Commissioner Knight said.
On Tuesday, the commissioners spent three hours behind closed doors before recessing their meeting until Wednesday. Commission President David Carrington said he went to bed optimistic the creditor might come around on a deal. Instead, creditors grew more intractable.
“When I left here yesterday, I thought we were close, but obviously some changes were made during the night,” Carrington said.
The governor, creditors and business leaders pressured the county to make a deal, but there was no deal to be made, at least not one that wouldn’t cause more harm to the county and its sewer customers. All but abandoned by the state’s business and political leaders, the commission had to show those same figures what leadership really meant, Carrington said in the meeting.
“It means that each one of us individually and collectively need to lead by example by replacing the threats of re-election consequences with thoughts of what is best for Jefferson County and our citizens,” Carrington said from the commission dais. “It is time that this commission shows, by example, other elected officials in our state and nation what it means to be statesmen, instead of mere politicians, when confronted with a difficult decision.”
Commissioner Jimmie Stephens made the motion, and Commissioner Sandra Little Brown gave the second. Only Commissioner George Bowman voted against the bankruptcy filing.
The filing means the county has declared war on its creditors. The fight will be long and expensive. But after the vote, the commissioners appeared to have the peace that comes after watching a loved one die after a long and painful illness.
Carrington said the county would ask the federal bankruptcy judge to block any immediate sewer rate hike the state court-appointed receiver might attempt. The receiver, John Young, has previously said an increase of 25 percent would be appropriate.
Even with the bankruptcy filing, the county must balance its 2012 fiscal year budget, which is $40 million out of balance. Those cuts could begin as early as December, commissioners have said.
“Things will get worse in December,” Stephens said. “Our revenues and expenses are still approximately $40 million apart, so we’re going to have to reduce services, as administered by the county, by roughly $40 million in the last quarter of this year. We are looking at all of those services that are not mandated by the constitution.”
Some commissioners, and County Manger Tony Petelos, do not believe that the county will be able to fulfill its constitutionally mandated services without new revenue. But for more revenue, the county will have to return to the Legislature. Carrington said the county would seek relief during the regular session early next year.
The meeting Wednesday was one year to the day since the current commission took office, and the anniversary was not lost on them.
“You’ve got to prune the tree in order for the tree to grow,” Carrington said after the meeting. “I think we were to the point after years of problems — and let’s face it, corruption — now is the time to purge the system and begin a new legacy for the county. I hope today will go down, as the last day of our first year, as the day that things changed. Tomorrow is a brand new day.”