Bankrupt Alabama county eyes debt cuts topping $1 billion

By Michael Connor and Melinda Dickinson

(Reuters) - Alabama's Jefferson County will within two or three months file a workout plan that calls for reducing the bankrupt local government's $4.23 billion of debts by more than $1 billion, according to the county's top elected official.

Filing a plan of adjustment, which is being readied as the county negotiates privately on terms with some creditors and battles in court with others, is a key step toward ending Jefferson County's landmark 2011 bankruptcy but it must be approved by a federal judge.

"Our final plan will include a reduction of more than a billion dollars," Jefferson County Commission President David Carrington said in an interview, declining to discuss details. "But there are other elements, too, that are just as important, like lower interest rates and extended payoff times."

Bankruptcy lawyers say there are too few precedents involving big local governments in bankruptcy to say what a plan might entail, though debt concessions such as extending the terms of bonds or reducing interest payments are frequently included.

The county, whose finances were ravaged by run-away sewer-system debt costs, political corruption and a legal case that killed a local tax, expects to file the adjustment plan within 75 days, Carrington said.

The county's target for filing may be a counter to creditor lawyers trying to scuttle the bankruptcy. They have repeatedly complained in court filings that Jefferson County was moving too slowly on developing an adjustment plan and that the bankruptcy case should be voided.

But U.S. Bankruptcy Judge Thomas Bennett has refused to set a deadline, noting the case was highly complex financially and legally.

Home to Birmingham, Alabama's biggest city, Jefferson County has sole authority to draft the plan under U.S. law. Creditors consent is not required to win a judge's approval but cuts in loan amounts or other changes must be deemed reasonable and equitable by Bennett.

Unlike corporate bankruptcies, in which creditors can seek asset sales or liquidation, so-called Chapter 9 bankruptcies named for a section of U.S. bankruptcy law leave large creditors such as JPMorgan Chase and Bank of New York Mellon open to possible non-negotiated reductions.

"County leaders hope to propose a plan with the consent of sewer creditors, but are prepared to 'cram-down' the plan on dissenting creditors," reported The Birmingham News newspaper, citing unnamed county officials.

Municipal bankruptcies are rare, and Jefferson County's plan may hold clues to how other troubled U.S. local governments may end crises caused by overwhelming debts and shrinking revenue. Detroit, which is widely seen as near bankruptcy, was taken over on Thursday by a state-appointed emergency financial manager.

Jefferson County's November 2011 bankruptcy filing remains the biggest ever by a U.S. municipality and was primarily driven by the sewer-system debt now estimated at $3.2 billion. The fiscal crisis forced large staff cuts and major reductions in county services.

Carrington said in the interview on Wednesday that negotiations with holders of some of Jefferson County's defaulted debt, including owners of education warrants, were progressing favorably. In addition, the county has so far reached negotiated deals with two creditors.

Bond insurer Ambac Assurance Corp agreed last year to reduce the county's $83 million a year payments on lease revenue warrants. European lender Depfa Bank Plcin February signed off on cutting interest rates on variable-rate school warrants in exchange for accerated payments by the county.

But the county's biggest creditors mostly holding sewer debt, such as JPMorgan, have shown little willingness to compromise, Carrington said, and are pressing ahead with appeals and other court actions.

A hearing on a dispute over hikes in sewer-system rates, which provide payments to sewer creditors, were scheduled to resume on Thursday in U.S. bankruptcy court in Birmingham. The court battles cost the cash-short county $1 million a month.

One possible template for the adjustment plan may be a 2011 terms sheet, which was developed by some creditors and the county before the Chapter 9 filing. It envisioned a $1 billion reduction in county debt but was never implemented.

The pre-bankruptcy terms included three years of sewer rate hikes of as much as 8.2 percent annually and a refinancing of about $2.05 billion of county sewer warrants into a 40-year debt backed by a pledge from Alabama's state government.

A regional business hub with substantial banking and medical sectors, Jefferson County has slashed its annual spending in its current fiscal year by $107 million from a year ago to $205 million. Officials have closed jails, ended in-patient care at a Birmingham hospital, and reduced the county payroll by 1,300.

County finances are too thin to fund any capital spending but were feeling some lift in early 2013 from an improving economy, according to County Manager Tony Petelos.

(Additional reporting by Verna Gates in Birmingham; Writing by Michael Connor in Miami; Editing by Tiziana Barghini and Andrew Hay)

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Exclusive: Bankrupt San Bernardino picks twice bankrupt manager

LOS ANGELES (Reuters) - The bankrupt city of San Bernardino has hired a new city manager who, according to court filings, has twice declared personal bankruptcy and was recently ousted from the board of a small community's water company after being sued by shareholders.

The city council voted unanimously on Tuesday night to hire Allen J. Parker, 71, as its city manager on an annual salary of almost $222,000. He replaces an interim city manager who resigned last month because, according to friends, she was exasperated by the city's internal divisions.

The interim city manager, Andrea Travis-Miller, could not be reached for comment.

Pat Morris, the mayor of the city in California, praised Parker's "wealth of city management experience" and expressed "great confidence" in his ability to oversee the city's affairs. Parker, who began working in the job on Wednesday, will be crucial in guiding the city of 210,000 people through municipal bankruptcy, in a case that could set a national precedent for Wall Street bondholders and pension funds in future municipal bankruptcies.

The mayor and council members knew about both of Parker's personal bankruptcies - the first in 1991 and the second in 2011 - and the litigation surrounding his water board tenure before they interviewed him, according to the mayor's chief of staff. They discussed both issues with him when they interviewed Parker last Friday. They say the issues were no impediment: the council interviewed two final candidates but voted unanimously to hire him.

The California newspaper The Press-Enterprise reported on Thursday that Parker filed in 2011 for personal bankruptcy. In comments to the paper, Parker said that his bankruptcy and his ability to handle the city's fiscal problems were "apples and oranges."

Calls and emails to Parker asking about his bankruptcy filings and his tenure on the water board went unanswered. An email to Parker asking if his wife Sara, with whom he jointly filed for bankruptcy in the 2011 petition, would comment also did not elicit a response.

The bankruptcy of San Bernardino, a city 65 miles east of Los Angeles, is a national test case as to whether the pensions of government workers take precedence over other payments in a municipal bankruptcy - a high stakes issue for pension plans and their beneficiaries, and for the Wall Street bondholders who lend money to governments.

City managers are central to any city's quest to seek bankruptcy protection, because they have a pivotal role in answering questions from creditors and the court. The judge overseeing San Bernardino's case must still rule on whether the city is eligible for bankruptcy before the case proceeds.

A TINY COMMUNITY

A 2009 lawsuit brought by a shareholder in the Banning Heights Mutual Water Company, where Parker was a director and then president of the board between 2004 and 2010, resulted in Parker being voted off the board in February 2010 after a court-ordered special election.

Banning Heights is a tiny unincorporated community 85 miles east of Los Angeles. The water company was formed in 1913 to provide water and today it serves about 250 residents.

Despite its small size, the water rights and land upon which the community sits are worth millions of dollars, according to John McClendon, the water board's general counsel. At one point under Parker's tenure on the water board, an entity called The Tahiti Group had placed $7 million in an escrow account to purchase the company, according to correspondence attached to court filings.

Court filings in the 2009 lawsuit, and a subsequent separate lawsuit brought by the water company allege that Parker, along with others, used their position on the board to try to sell the water company, against the wishes of shareholders.

Parker and others were also accused of withholding information from shareholders, according to those court filings. The shareholder sued in 2009 because he said Parker and others ignored the results of previous shareholder elections when they were voted off the board. Parker is not a defendant in the second lawsuit which is still active.

According to one court filing by the water company dated September 20, 2010, when shareholders gained access to the water company's office after Parker and others were voted off the board, computers were missing, hard drives had been wiped and bags of shredded documents sat on the floor.

In a deposition dated November 9, 2010 relating to the 2009 lawsuit, Parker said he never shredded documents and did not believe anyone "during our regime" on the water board shredded any documents.

After a judge ruled against Parker and others in the 2009 lawsuit and ordered a special shareholder election, they were voted off the board by shareholders in February 2010.

CITY DID ITS CHECKS

According to his resume, which does not mention Banning Heights Water Company, Parker has long experience as a local manager in several other California cities such as East Palo Alto, Half Moon Bay, Seal Beach, and Compton.

Jim Morris, the son and chief of staff to Pat Morris, San Bernardino's mayor, said the city had done its own thorough background check on Parker before he was interviewed by the council, last Friday. His bankruptcies, and the Banning Heights Mutual Water Company litigation, were known about by the time the interview took place, Morris said.

"We talked to the attorneys involved, and pulled the court filings. These were disputes over election results," Morris said. He said the Banning Heights litigation did not involve serious issues, and that such disputes occur on small entities such as the water board all the time.

Morris said there was no reason why Parker should have included his tenure on the water board on his resume. "He wasn't employed by the water board," Morris said. "His resume was an employment resume. If someone was a member of their local homeowners' association you wouldn't expect that to be on their resume."

Parker filed for personal bankruptcy in 1991, in San Mateo, California, according to court records. No further details were available. In February 2011, he filed for bankruptcy with his wife, in the U.S. Bankruptcy Court, Central District of California.

According to the 2011 bankruptcy filing, Parker and his wife listed among their debts two home mortgages with unsecured balances of $267,500, as well as bank and credit card debt of $137,252.

(Reporting by Tim Reid; Editing by Martin Howell, Tiziana Barghini and Claudia Parsons)

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