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Jeffco Gets Some Advice: ‘Who Can You Sue?’

By Alison Vekshin and Steve Church

John Moorlach, who became treasurer of Orange County, California, after it filed the biggest municipal bankruptcy in U.S. history in 1994, has some advice for the new record-holder, Jefferson County, Alabama.

“What they might be able to learn from us is: Who can you sue for bringing you to this crazy place?’’ said Moorlach, who got $800 million in settlements from Merrill Lynch & Co., Standard & Poor’s, broker-dealers and bond counsel after the county’s investment pool lost $1.7 billion when bets on interest rates soured.

Jefferson County, with more than $3 billion in sewer debt, follows Orange County in seeking court protection along with Vallejo, California, whose finances unraveled after the city failed to win labor concessions, and Harrisburg, Pennsylvania, which lost money on an incinerator.

“Jefferson County, however it turns out, is destined to have at least equal or substantially the same historical significance as Orange County,’’ said Bruce Bennett, who was the California county’s lead bankruptcy attorney.

Alabama’s most-populous county sought Chapter 9 bankruptcy reorganization on Nov. 9. The filing came after a deal fell through that would have cut the amount owed on sewer bonds while residents faced higher sewage fees to repay the debt.

JPMorgan Chase & Co., which arranged most of the debt, agreed to a $722 million settlement with the Securities and Exchange Commission in 2009 over payments its bankers allegedly made to people tied to county politicians to win business. That settlement included
“partial compensation for its wrongdoing in connection with the sewer-system indebtedness,’’ Jefferson County said in court papers filed as part of its bankruptcy.

The county has been under the threat of bankruptcy for more than three years. It will return to court in December for a hearing on whether it’s eligible to be in bankruptcy.

Orange County’s initial court filings listed debt that was higher than Jefferson County’s.  Much of it shrank in the early weeks of the case and the losses listed in the initial filing were reduced through lawsuits.

Vallejo, a former Navy town of about 116,000 near Napa Valley’s famed wineries and 24 miles north of San Francisco, entered bankruptcy in 2008 and emerged this year after a long battle with local unions.

“There’s been draconian cuts in our public-safety services and other city services,’’ said Marti Brown, a Vallejo council member. The biggest hurdle was reaching a compromise with its unions, including police and fire, she said. “There was a countersuit and fighting over whether or not we really had the money,’’ she said. “That ate up close to two years of the three and a half years we were in bankruptcy.’’

The city expects to be unable to access the credit market for five years because of its damaged reputation, officials say. Vallejo has to establish a history of dealing with its budget problems, keeping its finances in balance and making sure it makes payments, David Millican, Vallejo’s former senior adviser, said in May.

Orange County’s ability to borrow money wasn’t harmed by its bankruptcy. Within 18 months of leaving court protection, Orange County’s credit rating had returned to AA,
the same as before the filing, Bennett said. Orange County issued $1.04 billion in debt related to its bankruptcy in 1996, following a debt issuance in 1995 that was an interim step, according to Bob Franz, the county’s chief financial officer.

The first legal hurdle Jefferson County will face is a challenge to the filing. The county
must show that it has met all the tests for bankruptcy, including that it has negotiated in good faith with creditors and is in danger of being unable to pay its bills.

The receiver who runs the county’s sewer system is fighting to maintain his control. Because he was appointed by a state court, John S. Young Jr. claimed in court papers that the federal judge overseeing the bankruptcy lacks authority to return the system to the county. Young said the 10th Amendment of the U.S. Constitution, which reserves for the states powers not expressly given the federal government, trumps bankruptcy law.

The county’s lead bankruptcy attorney, Kenneth Klee, said in court that a fight over control of the sewer system’s finances may take place before the hearing next month on whether the county should remain in bankruptcy.

Klee was involved in preparing Orange County’s bankruptcy, though he left management of the case to Bennett. Jefferson County’s bankruptcy could last “two to three years,’’ Klee said, which would make it longer than Orange County’s case.

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