Make Jefferson County’s receiver its salesman
The story of Jefferson County, Alabama filing the largest municipal bankruptcy ever last week is well-known. The county went into hock for about $3 billion to build an EPA-mandated sewer system. On the way to completing the system, every local crook and corrupt politician piled onto the project to skim off some pork. Many of these players ended up in prison and left the taxpayers saddled with a sewer system they really can’t afford.
Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court. My advice to Jefferson County Commissioners is to stop fighting John Young and change his role into a salesman for the system. The sewer system is an albatross, and it should be sold and creditors repaid with the sale proceeds.
The Russell County Circuit Court’s mandate covered raising sewer rates and lowering costs but did not grant Mr. Young a role in facilitating a settlement with sewer debt creditors. According to Young, he took on that responsibility “unofficially.” He claimed to have traveled many times to New York City to negotiate potential haircuts on the outstanding debt, meeting repeatedly with JP Morgan, the biggest creditor, and other Wall Street banks. Young had a lot of experience dealing with Wall Street as the former president of the publicly-held American Water Works Company.
There is a lot of animus towards John Young in Jefferson County because he has been paid over $1 million in the last year and is perceived to be representing Wall Street instead of taxpayers. The Jefferson County political elite, from U.S. Representative Spencer Bachus to the Jefferson County delegation to the state legislature (shown in the video above), want John Young out of the county’s affairs. The Commissioners of Jefferson County filed a motion in federal bankruptcy to remove Young as the sewer system receiver. That motion will be argued on Monday.
I attended a luncheon yesterday of the Municipal Analysts Group of New York where John Young talked about his role running the sewer system, his trips to New York to meet with creditors and his current fight to retain control of the system in bankruptcy. What was clear from his presentation was that the sewer utility that he found when he stepped into the receiver role was run as a comfortable, good-ol’-boy operation with few management controls. He said that no income statement, balance sheet or long-term business plan had been developed for the system. As someone coming from a shareholder-owned company he first set to work getting operational metrics and cost accounting in place. Imagine transforming an utility that had just spent billions on infrastructure with few controls into a cost-driven operation. It’s a mighty feat.
But for all John Young’s contributions, he is probably more intent on representing the interests of Wall Street than those of the county’s taxpayers. Three big creditors — Bank of New York, Assured Guaranty Municipal Corp. and Regions Bank — have gone public in the last few days stating that Young must retain his position as receiver even as the Jefferson County tries to run him off using the bankruptcy court.
At the MAGNY luncheon I asked John Young what limitations there were on the sale of the sewer system. He said that there was a limitation on how much debt the system could support. He also said that he had bought a lot of water systems in his time at American Water Works. This explains why he has so much experience on Wall Street. He had been there a lot to rustle up funding for his American Water Works transactions.
I think the County Commission should see John Young as a salesman who knows the creditors and the sewer system. They should let him work to structure a deal to give the sewer system to the creditors, let them find a buyer and refinance and/or forgive the debt. JP Morgan has a team of bankers and analysts who could do some sweet deal and hold the other creditors’ feet to the fire. Of course this transfer must be done with an agreement on what future user rate increases would be. The main purpose would be to have no remaining debt on the county books for the sewer system. There are bound to be pension funds, endowments and other non-profit entities who would like to own a sewer utility and earn a fair and steady stream of income. It would also negate the need to ask the state for a moral obligation guarantee for any new sewer debt.
Although this plan is radical, after listening to John Young talk about the interest rate swap holders and creditors — some of which conflicting interests — I’m not sure anyone in the Jefferson County government has the knowledge and abilities to pull a deal together. I’m sure that County Commission President David Carrington and Commissioner Jimmie Stephens have done an excellent job negotiating for the county, but they have a host of other issues to address, like how to get the state legislature to pass a new law raising tax revenues for the county.
John Young should be out of the county’s affairs. But he should have a big role in assisting the creditors as they restructure the sewer system debt and in removing those liabilities and the sewer system from the county’s balance sheet.
Video source: Alabama13.com
Reuters photo: A general view of Valley Creek Waste Water Treatment Facility located in Jefferson County, Alabama