Editorial on Jefferson County’s Bankruptcy

Originally published on August 11, 2013 in the Birmingham News.

Since filing for bankruptcy protection in November 2011, Jefferson County has made significant progress on all fronts. Although the County’s $3 billion sewer debt gets most
of the headlines, the County has another $1 billion in general obligation and school construction debt that has been advantageously restructured in the bankruptcy plan.
This has been accomplished by adjusting future payments to match anticipated revenues so that these debts, as well as the Bessemer Courthouse debt, are paid in full.

Sewer rates do receive a lot of media attention though, and rightfully so. In fact, a recent Birmingham News editorial asked who was representing the sewer ratepayers. I
can say without reservation that Commissioners Brown, Stephens, Knight and I are responsibly doing so. Without bankruptcy, the sewer receiver planned to double sewer
rates in a twelve month period with three compounded 25% increases spaced six months apart. Conversely, it is unrealistic to expect that sewer rates will not increase as
Commissioner Bowman publicly advocates.

Recently, the Birmingham News inaccurately reported that “among other major sewer systems in the country, Jefferson County’s sewer rates are second only to Atlanta”. This
just isn’t true. Cincinnati, Charleston and Seattle (among others) are significantly higher. In fact, the County’s sewer rates are not even the second highest in Alabama. For
example, North Shelby County’s sewer rates recently increased to $85.83 a month, more than double Jefferson County’s average residential bill.

Under the County’s proposed bankruptcy plan, the current sewer creditors will receive $1.835 billion for the $3.078 billion in debt they hold, a discount of more than 40%, not
including the elimination of more than $780 million in swap termination fees. This is significantly better than any detailed plan advanced by previous commissioners, their
“experts”, the sewer receiver or state officials. It is also significantly better than the proposed 2011 settlement that collapsed for many reasons, including the limited support
for required legislation and a shortfall of more than $140 million in creditor concessions.

Some have incorrectly concluded that all of the plan’s sewer rate increases are to pay for the new sewer debt. This also isn’t true. In fact, most of the future sewer revenues
will be used to fund operating expenses and capital improvements.

The County’s Plan fully funds the system’s capital needs for the next 10 years, including more than $160 million in required EPA investments. It would not be fair, nor fiscally
prudent, to require current ratepayers to pay today for capital improvements 20, 30 or 40 years into the future. In fact, I’m not aware of any other utility that has embedded
rates that will fully pay for 40 years of capital improvements without additional borrowing. This includes the Birmingham Water Works Board, a bankruptcy plan critic,
which despite dramatically increasing its rates for more than a decade, has only funded approximately 50% of its planned capital improvements through 2018, with no apparent
funding thereafter.

On July 23, the Commission revised the plan’s sewer rate schedule. This revision did not increase the amount the County will pay existing sewer creditors, but does increase
a typical customer’s “base charge” from $10 to $15. This fee is far below the base charge of other utilities, including the Birmingham Water Works, which currently has a
base charge of $19.80. Establishing this base fee allows the Commission to better stabilize revenues when water use declines (as it did this year with the cool, wet
weather) and customers’ bills when water use increases (as it did last year with the hot, dry weather).

One uninformed and uninvolved University of Alabama finance professor has recklessly questioned the County’s proposed financing strategy. It should be noted that this
individual was previously a senior advisor to Birmingham Water Works consultant Porter White. The efficient and effective use of Capital Appreciation Bonds and Convertible
Capital Appreciation Bonds allows the County to lessen its near-term debt service burden and corresponding sewer rate increases, while providing for future debt
repayment with smaller annual increases that will also be used for inflationary increases in operating expenses and future capital investments. In fact, numerous issuers
nationwide, including the University of Alabama’s Board of Trustees, Auburn University, Birmingham, Mobile and Huntsville, have used Capital Appreciation Bonds in their
financing plans.

Many in the media and creditor community have questioned this Commission’s resolve to address the massively complex financial and operational issues facing Jefferson
County. They have been wrong in the past and they will be wrong in the future. The County’s goal is to exit bankruptcy by the end of this year, but many challenges remain,
including the instability of interest rates. In order to accelerate much needed economic development and job creation, Commissioners Brown, Stephens, Knight and I are fully
committed to cleaning up the messes created by our predecessors without unreasonably burdening our citizens.

Originally published on August 11, 2013 in the Birmingham News.