The Expert Witness Dilemma Aundrea Kay Guess, Samford University Lowell Broom, Samford University James Reburn, Samford University
Copyright © 2016 by the Case Research Journal and by Aundrea K. Guess, Lowell Broom, and James Reburn. An earlier version of the case was presented at the 2014 annual meeting of the North American Case Research Association in Austin, Texas. The authors would like to thank John Lawrence, Jerald Meyers, and NACRA reviewers for their valuable comments and recommendations.
Dr. Jonathan Strauss, an accounting professor at Samford University, was sitting in his office in mid-February of 2012 reading about the Jefferson County, Alabama (the County) bankruptcy filing in The Birmingham News. The cor- ruption and potential bankruptcy of the County had captured not only his attention for the past two years, but the attention of many others across the nation. After all, the County’s bankruptcy filing was the largest municipal bankruptcy in America as of 2011. It was very interesting to read about all the events that unfolded like a good movie. Only, the events were not good for the citizens of the County and the sur- rounding suburbs. Strauss had lived in Birmingham for over twenty-five years and had grown to love the city and the university where he taught accounting.
“Well,” he thought, “I have to put this aside and get ready for class.” He was off to the copy room to copy his exams. When he returned, there was a phone message. As he listened to the message, he was a little startled. It was from an attorney involved in the County’s bankruptcy! A quick thought ran through his head: “why is he calling me?” His curiosity was piqued so he decided to not wait until after class to return the call.
Hello, this is Dr. Jonathan Strauss from Samford University. I am returning a call from Mr. Dylan Black.
This is he. Hello, Dr. Strauss, I am with the law firm of Bradley Arant. We are repre- senting Jefferson County in their bankruptcy trial. David Carrington, president of the Jefferson County Commission, suggested that you might be willing to be an expert witness for us at the trial. Do you think you would be willing to do that?
Strauss responded: “Well, I am certainly willing to discuss that possibility with you.” The attorney continued: “Good, I have a second question: are you an expert on GASB 34?” Strauss responded. “Well, I think so.” “On what grounds are you considered an expert?” asked Black.1
That question was a bit unsettling. Strauss thought for a moment about why he considered himself an expert. He replied with a list of achievements:
1. A Certified Public Accountant licensed to practice in the State of Alabama. 2. Taught governmental accounting for 20 years at the university level.
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3. Regularly reviewed the governmental accounting standards as part of his teaching responsibilities.
4. Occasionally worked as a consultant with accounting firms on governmental accounting issues particularly related to financial reporting issues.
5. Sat on a financial advisory board for the mayor of the city of Vestavia Hills (a suburb of Birmingham, Alabama.)
6. Taught continuing professional education on various governmental account- ing topics, including several seminars on the implementation of GASB 34.
“Good. Thank you,” was the response from the attorney. After a brief discussion regarding what Black wanted Strauss to assist him with in the case, Black concluded the conversation with, “I will be back in touch with you in a few days.” The phone clicked on the other end. Strauss thought, what may I have just gotten myself into? He knew that the time to prepare for such a trial would be significant, and likely stressful, and could intrude on his other professional obligations and his personal life. Would the professional and financial benefits gained from involvement in the bankruptcy case be worth the costs?
Strauss picked up his exams and hurried off to class. While the students were tak- ing the exam he thought about the bankruptcy trial. Questions began to inundate his thoughts. “What indeed was an expert? How would the court define that term? How would the requirements of GASB 34 and one of the latest pronouncements, GASB 58, be relevant in the County’s bankruptcy proceedings? The other side would probably have an “expert witness.” What if we differed in our opinions of applying GASB standards to the bankruptcy, which is likely on some major points? How might the bankruptcy judge rule on any differences of application? Which expert would he believe?” Strauss had read numerous published articles about the events leading up to the bankruptcy and he was familiar with the different views of various interested par- ties regarding who was responsible.
Strauss knew from his prior experience, his knowledge of the County’s bankruptcy case, and his brief conversation with Black, that preparation for his work on the case would require reading the indenture contract related to the County’s bonds, court filings by each side, depositions of others who would be testifying, as well as several reports that would be filed with the bankruptcy court by parties interested in the case. In addition, it would also be necessary to conduct a detailed analysis of several GASB standards related to expense classification, financial statement formatting, and pro- nouncements related to Chapter 9 bankruptcy2 such as GASB 58. He would probably be asked to determine the appropriate application of certain parts of GASB 34 and 58 that related to the case. He wondered if he was willing to tackle such a complex task. He also knew the bigger question might be whether or not he could testify as an expert in the way that would serve the interests of the attorneys for the county. Long ago Strauss had determined that he would never compromise his principles to earn money. If he could not express an expert opinion to support the position of the county’s attor- neys, he would simply need to make them aware of that as soon as possible so they could find another expert.
Before he could officially accept an engagement to serve in either a litigation support role or as an expert witness in the case, Strauss’s employment contract with Samford University required that he obtain written permission from the university to engage in consulting work outside of one’s faculty responsibilities.3
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The Expert Witness Dilemma 3
In discussing the opportunity with his dean and associate dean, Strauss indicated he would likely be testifying on issues related to the meaning or application of cer- tain aspects of the indenture contract.4 As he completed that statement, the associate dean interrupted, “Wait a minute. Given that Jefferson County (a municipality)5 has declared bankruptcy I was under the impression that all such contracts with creditors are now null and void. Isn’t that what a bankruptcy is all about? Why does it matter what the indenture agreement calls for at this point?” He did not have an immedi- ate answer to the question raised by the associate dean. Strauss thought, “well does it matter?” Among other items or documents, the history of the sewer system and bank- ruptcy, the receiver’s report, and the indenture agreement had to be reviewed in great detail before I draw any final conclusions, he thought.
Strauss had obtained the appropriate permission from his employer to proceed and he agreed to meet with Black to discuss the issues related to the Jefferson County bankruptcy proceedings. Strauss had made it clear to Black that he had not completed the work necessary to form final opinions on the issues discussed to date and that he would not testify to any matters that his research did not support. Black assured him that Bradley Arant would never ask him to compromise his integrity in any way whatsoever and encouraged Strauss to always speak the truth whether in private con- versations with representatives of Bradley Arant (or other attorneys representing the county) or in official court proceeding. Black and Strauss agreed that Strauss would serve in the role of litigation support for the attorneys representing the county in the bankruptcy proceedings, with the understanding that Strauss would move into the role of an expert witness if his research allowed him to testify in support of certain legal positions that the county’s attorneys had taken in the case. At that point Strauss began a detailed analysis of various documents related to the sewer system, its failures, and the financial difficulties related to the system which were all provided to him by Black. A summary of what he discovered is outlined below.
History of tHe sewer system
Problems with the sewer system in the county date back as early as 1901.6 Through the years state and local officials failed to sufficiently fund the needs of the system. The officials responsible for setting sewer rates, all of whom were elected, refused time and again to raise rates to an appropriate level. The refusal stemmed from the fact that sewer rate payers were also voters and the elected officials, apparently, feared a voter backlash at the polls. The system was “patch worked” over the years, not managed by an appropriately qualified staff, and not kept in proper working order, due primarily to the resulting lack of funding. Responsibility for the system was divided between the county and the municipalities. That division contributed to lack of supervision of hookup requirements and inadequate local collection systems sufficient to prevent infiltration of storm water into the sanitary sewer system.
By 1994 citizens’ complaints about overflows and possible drinking water contami- nation caused by an outdated, under-funded, and antiquated sewer system seemed to reach a peak. The U.S. Environmental Protection Agency (EPA) joined taxpaying citizens and filed suit against the county in 1994 in federal district court. In 1996, a Consent Decree was issued by the court that required the county to set up a county- wide sewer system and to bring that system into compliance with stringent operational requirements.7 Consequently, the county assumed control of and responsibility for
This document is authorized for use only in KRIS MICHAELSON’s ACT580 – S18B at Colorado State University – Global Campus from Apr 2018 to Sep 2018.
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twenty-one separate municipal sewer systems that consisted of 2,178 miles of sewer lines and related processing facilities, with the Jefferson County Commission (made up entirely of elected officials with little or no experience in sewer system operation) becoming the combined system’s board of directors. Despite the fact that almost all those sewer systems had been mismanaged by the municipalities responsible for them to that point, the county received no compensation from the municipalities for any of the remediation efforts required under the decree.8 The decree had what some thought was an unreasonable time frame to meet the stringent (and some called unreasonable) requirements of “no overflows.” The Consent Decree was approved and executed by both the county and the State of Alabama. The state was a party to the decree litigation and could be held liable for violations of the decree if state law prevented the county from raising revenues needed to comply with the judgment.
Compliance with the decree required the county to issue sewer warrants in order to raise the funds needed for improvements called for in the decree.9 In 1996, the county estimated the cost to complete the repairs and rehabilitation was between $250 mil- lion and $1.2 billion. By 2003 the estimate had grown to $3.05 billion. (See Exhibit 2 for a summary of warrants issued to finance sewer system improvements). The capi- tal improvement program created suffered from significant design flaws, was poorly implemented, and was overseen by numerous corrupt elected and appointed officials, leading to substantial and wasteful cost overruns and a failure to eliminate problems related to system overflows.10 The Environmental Services Department (ESD) of the county was in charge of the project and it probably did not have the expertise on staff to handle a project of that magnitude even if the elected official with ultimate respon- sibility had not been corrupt.
Jefferson County BankruptCy
On November 9, 2011, the county filed the largest U.S. municipal bankruptcy on record.11 The county listed total debt of more than $4 billion in the Chapter 9 filing, including over $3 billion of sewer bonds. The Jefferson County Commission concluded that declaring bankruptcy was the only option after investors refused to negotiate on $3.1 billion in sewer bonds. The court-appointed receiver (John Young), who by this point in time ran the county’s sewer system, and investors were at an impasse with the commissioners. The county and the bondholders were about $140 million apart on how much sewer debt the county could bear. The county would accept $2.05 billion but creditors demanded more. There were disagreements on numerous other issues between Young and the county.12
The financial condition of Jefferson County was the result of several factors: JP Morgan convincing the county commission to go from fixed rate bonds to variable rate bonds, widespread corruption, a loss of revenues due to the overturning of an Occupational and Business License Tax that funded 25 percent of the county’s general operating fund, and the financial crisis of 2008.13 Those four factors, which are dis- cussed in more detail below, led to the inability of the county to meet principal and interest payments on its long-term debt and a downgrade of the ratings on the county’s municipal bonds. Per the bond covenants, failure to make timely payments and the downgrade in the bond ratings resulted in the principal on the bonds outstanding becoming immediately due and payable. The county did not have sufficient assets to make such payments and there was seemingly no way to obtain them in the foresee- able future.14
The Expert Witness Dilemma 5
JPMorgan Chase (JPMC) was investigated by the Securities and Exchange Com- mission (SEC) for “directed fee payments” to three local securities firms who were involved in various interest rate swap activities related to the county’s sewer debt.15 Those firms were paid $3.9 million by JPMC to either help them obtain the Jefferson County business or to keep them from interfering with those activities. That cost was passed on to the county by charging additional fees for services. JPMC had convinced the commission president to change the bond structure from a fixed rate to variable rate bonds. That created an opportunity for JPMC to make more money on the bonds. Ultimately, the SEC fined JPMC $75 million, and the firm was required to release the county from $648 million owed to JPMC for termination swaps as a result of the firms participation in the corruption related to the issuance of new sewer debt related to the decree (SEC Proceedings). Jefferson County continued to owe JPMC approxi- mately $9 million for a termination payment plus accrued interest for swaps tied to the county’s general obligation bonds.
By the time of the county’s bankruptcy filing, it was clear that corruption had existed “from the top down” from the very beginning of the sewer reconstruction process. Four of the five county commissioners holding office at the time of the major sewer reconstruction activities were convicted of accepting bribes to award construc- tion and consulting contracts to favored companies. Six county employees, nine individual contractors, and five engineering firms were also found guilty of bribery for acts related to the construction process. (See Exhibit 3 for details of the people involved and the convictions rendered). The sewer project was fraught with incom- petence at every level of design and construction, and at the time of the bankruptcy filing, the system was still not in compliance with the EPA Decree. As a result, millions of dollars had been wasted or spent unnecessarily on the sewer reconstruction project by the end of 2011.16
As the impact of the JPMC deception and corruption among the county’s elected commissioners, employees and contractors came to light, the Alabama State Leg- islature failed to extend the Occupational and Business License Tax that had been collected by the county for several years. The occupational tax accounted for roughly 25 percent of total revenues (50 percent of discretionary revenue) for the county. The tax had been challenged many times in the courts and in April 2011 was struck down by the Alabama Supreme Court as unconstitutional. The court ruled that the state legislature failed to pass a replacement tax because of a long running dispute between county and state elected officials. County officials did not have authority to levy taxes without the permission of the state legislature.17
The final nail in the county’s financial coffin was the financial crisis of 2008. The recession hit the entire nation and resulted in municipalities losing billions in tax rev- enues. Home prices fell, property values fell, and double-digit unemployment existed in almost every community as a result of the recession. Many businesses closed and laid off their entire work force. Banks, other types of financial institutions, and the stock market reeled from the fallout. The federal government began to “loan money” to large financial institutions and manufacturing companies (i.e.,. General Motors and Chrysler) in an attempt to prevent an even deeper recession or depression. As was the case for municipalities all over the country, Jefferson County experienced a significant drop in their normal revenue streams from property and sales taxes beginning in the latter part of 2008.18
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The apparent mismanagement of the county’s sewer system, including the grossly flawed attempt to comply with the EPA Consent Decree, led citizens to bring a class action suit against the county. On September 22, 2010, the Circuit Court of Jefferson County entered its Receiver Order and appointed John Young as the receiver for the Jefferson County Sewer System. Young was a New Jersey waterworks executive with over thirty years’ experience in the utilities industry.19 He was appointed as a result of the county’s default on its obligations under the Trust Indenture and Supplemental Indentures entered into between 1997 and 2003. The court found that the county had failed to operate the system in an economical, efficient, and proper manner and the public interest would be best served by the appointment of the receiver. The receiver’s duties were to administer, operate, and protect the county or its creditor groups. The court bestowed on the receiver the full right and authority to perform any act that was reasonably believed ought to be done for the efficient administration, operation, and protection of the system. The receiver had the sole power to fix and charge rates and collect revenues sufficient to provide for the payment of all system obligations and the expenses of operating and maintaining the system.20
The result of the court order was that the operation of the sewer system was taken out of the hands of the county and given to Young. He cut costs by eliminating 186 employees and estimated the average sewer service charge needed to increase to $309 per month to cover the debt load. In September, 2011, the county executed a non- binding term sheet for the restructuring of the sewer system indebtedness (the “term sheet” see Exhibit 4). The term sheet was countersigned by Young who presented him- self to the county as an intermediary for the holders of the majority of the Sewer Warrant indebtedness. In a short time, Young and certain holders of the warrants back- tracked on the commitments in the term sheet and refused to work with the county.21
Young received compensation in the amount of a little more than $1M for fourteen months’ work as receiver. In addition, he demanded the county transfer the $75M in cash received from the settlement with JPMC from its general fund to the sewer fund on the theory that the sewer fund was the rightful recipient of the $75M rather than the county. If those funds remained in the county general fund, the county was free to spend that money on whatever it pleased. If those funds were transferred to the sewer fund, they would effectively belong the holders of the sewer system revenue bonds and could not be spent for any other purpose. Such a transfer would have reduced the county’s general fund reserves to zero, further hampering the county’s ability to pro- vide basic services to its citizens. Young also continued to threaten high rate increases in various public forums, creating anger among citizens.22
strauss Continued His work—analysis of tHe indenture agreement
Strauss acquired a copy of the indenture agreement and analyzed it thoroughly. The indenture was the legal contract between the bond issuer (Jefferson County) and the bond holder (numerous parties in this case). It included a section requiring a detailed order of disbursements of the revenues collected by the Jefferson County Sewer System from its customers. The indenture document indicated there was a “water-fall” process for the distribution of sewer fund revenues. Specifically, the indenture required that
The Expert Witness Dilemma 7
the first distribution “bucket” would be an amount necessary to pay the operating expenses of the sewer system. Once those expenses were paid, the second distribution bucket to be filled was defined as amounts necessary to fund payment of all interest and principal due to the holders of the sewer systems bonds (or warrants as they were referred to in the indenture). If any monies remained from the collected revenues after that, there were three other buckets into which deposits were to be made in a specified order. At the time of the bankruptcy filing, all parties to the indenture agreed that there was absolutely no possibility in the foreseeable future that any funds would remain after funding the first two buckets. In fact, the bankruptcy filing was a clear indication that there was not sufficient money from revenues collected to fund even the first two buckets. What the indenture required regarding the amounts that should go into each of those buckets was a significant point of contention between the county and the bond holders. The indenture defined operating expenses as follows:23
. . . (a) the reasonable and necessary expenses of efficiently and economically admin- istering and operating the sewer system, including, without limitation, the costs of all items of labor, materials, supplies, equipment (other than equipment chargeable to fixed capital accounts), premiums on insurance policies and fidelity bonds maintained with respect to the sewer systems (including casualty, liability and any other types of insurance), fees for engineers, attorneys and accountants (except where such fees are chargeable to fixed capital accounts) and all other items, except depreciation, amor- tization, interest and payments made pursuant to Qualified Swaps, that by generally accepted accounting principles are properly chargeable to expenses of administration and operation and are not characterized as extraordinary items, (b) the expenses of maintaining the sewer system in good repair and in good operating condition, but not including items that by generally accepted accounting principles are properly charge- able to fixed capital accounts, and (c) the fees and charges of the Trustee.
The indenture also stated that the county was required to maintain customer sewer rates that would be sufficient to provide for (a) the payment of the interest and prin- cipal on the sewer system debt when that principal and interest was due and payable, (b) the operating expenses of the sewer system, and (c) funds to enable the county to perform and comply with all of its covenants contained in the indenture. The inden- ture required the county’s director of finance to make an evaluation within sixty days of the end of each fiscal year of whether current rates allowed the county to meet the provisions of the indenture. If current rates were not sufficient to do so the county was required by the indenture to notify the trustee representing the bond holders in writ- ing of such a condition by December 10th, of the fiscal year following the shortfall in revenues. In addition, in the event of such a shortfall the county was required to raise the rates charged to its customers to an amount necessary to meet the requirements of (a), (b), and (c) in this paragraph and put those rates into effect as of January 1st of the fiscal year following the occurrence of the shortfall in revenues. It should be noted that the county’s fiscal year end was September 30th.
According to the indenture, an “Event of Default” would occur when any one of the following (as well as some other conditions) occurred or existed:
a. failure of the county to pay the principal and/or interest as specified by the indenture when due
b. failure of the county to adjusts rates that the county charged its customers as specified in the indenture unless the county hires a utility system consultant to review the system and its existing rates and the county makes a good faith effort to comply with the recommendations of such consultant
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c. a receiver, trustee, or liquidator is appointed by a court to assume control of the system or
d. the county files a petition of bankruptcy with a state or federal court.
The indenture provided that if an “Event of Default” existed, the trustee for the bondholders could (a) declare the sewer bonds to be immediately due and payable, (b) by civil action compel county officials to perform as required by the indenture agree- ment including the fixing of sufficient rates charged to sewer system customers, or (c) seek the appointment of a receiver by an appropriate court to operate the sewer system (including the setting of appropriate rates charged to the sewer system customers) in accordance with the requirements of the indenture.
finanCial statement review
The financial statements for the fiscal years ended September 30, 2007, through 2010 were audited by Warren, Averett, Kimbrough, and Marino (WAKM). WAKM was a highly respected regional CPA firm that operated offices in five southeastern states. Each of those audit opinions included numerous variations in wording from the stan- dard unqualified opinion. All four opinions were qualified due to either the inability of WAKM to form an opinion on the fair value of the infrastructure assets for which the county assumed control in 1996–1997 in response to the federal consent decree and/ or the inability to determine the liability for other post-employment benefits that the county had failed to record on its books. Each of those four opinions also included a “Going Concern” paragraph because of issues related to the possibility that the county would be unable to pay the principal and interest payments on the debt that had been issued to upgrade the sewer system. Those audit reports were also modified due to the county’s omission of the Management’s Discussion and Analysis required by GASB Statement 34.
The financial picture painted in the financial statements for fiscal years 2007 through 2010 was not a positive one for the county’s sewer operation. During all four of those years the sewer system reflected negative operating results in the funds por- tion of the statements and negative cash flows during all fiscal years except 2010 when there was a slight positive cash flow. The net assets of the sewer system declined during the four years from over $825 million at the end of fiscal 2007 to $138 million at the end of 2010.
After studying what seemed like a mountain of documents that allowed him to develop an understanding of the facts outlined in the previous paragraphs, Strauss had a series of meetings with the attorneys representing the county in the bankruptcy proceedings. Those meetings included attorneys from both Bradley Arant as well as attorneys from Klee, Tuchin, Bogdanoff, and Stern; a Los Angeles law firm that spe- cialized in municipal bankruptcy who was serving as the county’s co-council.
additional disCussions witH tHe County’s attorneys
After reading the most recent financial statements of the county (see Exhibit 5) Strauss knew that the county had both general obligation debt and special revenue debt out- standing at the time the bankruptcy was filed, but the majority of the county’s sewer system long-term debt was special revenue debt (See Exhibit 1). Payment of the prin- cipal and interest of the debt of the county sewer system was insured by policies issued
The Expert Witness Dilemma 9
by Financial Guaranty Insurance Company, Syncora Guarantee, and Assured Guaranty Municipal. All of those insurance companies were litigates in the bankruptcy proceed- ings because they would be liable for payments to the bond holders if the county did not make the principal and interest payments called for in the bond contract. Bank of New York Mellon was serving as the representative of the numerous bondholders in the litigation and was referred to in all court documents as the “Trustee” for the other bondholders in the bankruptcy proceedings.
Early in the pre-trial discussions with the attorneys from the two law firms repre- senting the county, Strauss was asked to explain the modified approach for reporting depreciation outlined in GASB 34 and why that approach was allowed by GASB. Strauss was a bit surprised at that line of questioning because he knew depreciation was specifically excluded from what was considered operating expenses by the Indenture. He later learned that the attorneys intended to use the modified approach outlined in GASB 34 to support the inclusion of certain large infrastructure-related expenditures by the county in the category of operating expenses. The bondholders were arguing that such expenditures were capital expenditures that should not be treated as oper- ating expenses in determining the amount of sewer system revenues that should be distributed to bondholders each month.
Strauss spent significant time with the county’s attorneys during pre-trial discus- sions outlining how certain costs related to a Chapter 9 bankruptcy filing might be treated on the financial statements of the governmental entity filing the bankruptcy petition. It was clear to Strauss that the attorneys wanted information about how legal expenses directly related to the bankruptcy that were being incurred by the county would be classified according to GAAP. Strauss quickly learned that this would be a critical issue in the bankruptcy proceedings. Such expenses were significant, usually in the range of $1 million dollars per month for the past several years. The county con- tended that those legal fees were operating expenses that should be paid out of sewer revenues before determining the net revenues available to pay principal and interest to bondholders. The bondholders were contending that such expenses were extraordinary in nature and, per the indenture agreement, could not be treated as operating expenses and would need to be paid by the county from resources other than sewer revenues. Strauss spent a significant amount of time reading GASB 58 and other literature for information that would support either the position that the county wanted to take on legal fees related to the bankruptcy or the position the bondholders supported regard- ing the classification of such costs. At the time that analysis was being conducted, financial reporting standards for both governmental and non-governmental entities required that certain items be classified on the financial statements as “extraordinary items.” Such items were required to be presented on the face of the operating state- ment “net of tax” after the calculation of “income from continuing operations.” See Exhibit 6 for additional information on extraordinary item criteria.
The attorneys for whom Strauss was working wanted him to testify on at least two issues. The first was the content of GASB 34 as it related to depreciation of infra- structure assets and how the options allowed for reporting the depreciation. That standard could support the county’s desire to expense (at least for determining income in compliance with the indenture agreement) certain costs that might otherwise be
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capitalized. The second issue involved evaluating whether legal expenses related to the Chapter 9 bankruptcy incurred by the county should be classified as operating expenses or extraordinary expenses. Strauss was acutely aware that support for more than one position existed for both of those key issues. His job now was to determine which of the positions was most appropriate. Making such a determination for either of the two questions would not be easy.
Strauss knew the importance of being totally confident in the positions he chose to take on any of the issues in question. If he chose to move forward as the county’s expert witness, going through the deposition process and testifying in court was not going to be a walk in the park. He would be challenged. Strauss understood clearly that his challengers would not be a group of inexperienced 20–22 year old students over whom he held the threat of a grade. He knew his challengers would be a group of very experienced, very bright professionals whose only goal would be to raise ques- tions regarding his reasoning and make him look bad. Among his challengers would be some of the best lawyers in the country supported by highly trained and experienced governmental accounting specialists. That process would be far from a friendly debate or exchange of ideas. Millions, maybe even billions, of dollars were at stake and it was clear to Strauss that the combatants would behave accordingly.
Early in the pre-trial discussions with Dylan Black, Black had asked Strauss if he could borrow a printed copy of GASB standards over the week-end. Black indicated that he wanted to read some of the GASB standards himself to better understand some of the issues regarding governmental financial reporting. Strauss made such a copy available to Black, but he couldn’t help but think that Black would be wasting his time trying to decipher the GASB standards. Strauss knew that Black was very bright and a graduate of the University of Virginia School of Law, but he also knew that he had absolutely no formal training in either business or accounting. GASB stan- dards were often a difficult read even for experienced and highly trained governmental accountants. Strauss was shocked when he met with Black during the early days of the subsequent week. It was obvious that Black had read literally hundreds of pages of the GASB standards. From the questions he asked Strauss it was equally obvious that Black had a very clear grasp of what he had read. Strauss was absolutely amazed at what Black had been able to accomplish over a single weekend.
Strauss was not naïve. He knew the trustee and the insurance companies who were opposing the county in the proceedings would have attorneys who were as brilliant and as experienced as Black—maybe even more so. In fact, he had already been told to expect a court room full of “New York Lawyers” if he testified in court as an expert. He also knew that the Jefferson County bankruptcy had been a major news item all over the country because of its size and the implications it would likely have on the municipal bond market, particularly the market for revenue bonds. He knew it was likely that his testimony in court would be covered by all of the major financial press outlets. What if he overlooked a relevant standard or interpretation that had been issued by GASB or other pronouncements that were relevant to the case? If that hap- pened Strauss knew that he would look like a fool. How would that look on the front page of the Wall Street Journal for the entire world to read—particularly Strauss’s fam- ily, friends, and colleagues?
Strauss knew that it was decision time. To continue with the case, Strauss would need to be absolutely certain about any position he chose to take. That arena was no place for uncertainty or for the faint of heart!
The Expert Witness Dilemma 11
Exhibit 1: Explanation of Debt Instruments (Warrants) and Financing Used by Jefferson County, Alabama
(Adapted from the Financial Statements of Jefferson County, Alabama, Covering Various Fiscal Years from 1990 through 2012) Warrants payable include obligations for warrants issued in the name of the Jeffer- son County Commission for the primary purpose of sewer capital projects and related improvements (Business-Type Activities—Sewer Revenue Warrants), for the primary purpose of general capital projects and related improvements (Governmental Activities— General Obligation Warrants), for the primary purpose of school capital projects and related improvements (Governmental Activities—Limited Obligation School Warrants) and for the primary purpose of the Public Building Authority related capital projects and related improvements (Governmental Activities—Lease Revenue Warrants). Warrants payable also included related amounts of premiums and discounts on the warrants and any losses on advance refunding of warrants, which are deferred and amor- tized over the life of the warrants. Beginning prior to 1992, the Commission issued various warrants for sewer related capital projects and improvements. The Commission entered into a Trust Indenture (the Indenture) (as supplemented and amended) dated February 1, 1997, between Jefferson County, Alabama and AmSouth Bank of Alabama (AmSouth Bank), as Trustee, for the general purpose of refunding warrants outstanding or obtaining funds for capital sewer projects and improvements. The Indenture provides for the issuance of additional securi- ties secured on a parity of lien with the original issues of warrants. The Bank of New York Mellon, as successor to AmSouth Bank, currently serves as Trustee under the Indenture. The Commission also entered into Standby Warrant Purchase Agreements related to the variable rate warrant offerings, as discussed further below. The warrants issued under the Indenture were not general obligations of the Commission, but represented limited obligations of the Commission, payable solely out of and secured by a pledge and assignment of the revenues (other than tax revenues) from the Commis- sion’s sanitary sewer system remaining after the payment of operating expenses. Payment of the principal and interest on the warrants when due was insured by municipal warrant insurance policies issued by Financial Guaranty Insurance Company (FGIC), Syncora Guarantee Inc. (Syncora) (formerly known as XL Capital Assurance, Inc.) or Assured Guaranty Municipal Corp. (AGM) (formerly known as Financial Security Assur- ance, Inc.), simultaneously with the delivery of each series of warrants discussed below, except the Series 2003–A warrants which were issued to an affiliate of the State of Ala- bama (see discussion below). General Obligation Warrants Beginning in 1984, the Commission issued various warrants for capital projects and improvements, including construction of a new jail facility located in Bessemer (Jefferson County), purchase of 200 school buses for the Jefferson County Board of Education, acquisition of land and landfills for the disposal of waste, additions and improvements to the sanitary sewer system, improving and building certain roads, waste transfer system and various other capital equipment, buildings and facilities for use by the County. The General Obligation Warrants are general obligations of the Commission and are payable out of the general fund from the Commission. Repayment of the outstanding general obli- gation warrants was secured by the full faith and credit of Jefferson County. Payment of the principal and interest on the warrants when due was insured by a munic- ipal warrant insurance policy issued by Ambac Assurance Corp. (Ambac) or National Public Finance Guarantee Corp. (National) (formerly known as MBIA Corporation, Inc. (MBIA)). Ambac incurred a series of ratings downgrades and filed Chapter 11 bankruptcy in November 2010 as discussed further below.
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Exhibit 1: continued
Limited Obligation School Warrants Beginning in 2004, the Commission issued various warrants for school capital projects and improvements. The Commission entered into a Trust Indenture dated December 1, 2004, between Jefferson County, Alabama and SouthTrust Bank (Wells Fargo owned in 2008), as Trustee, for the general purpose of obtaining funds for school capital projects and improvements. The Trust Indenture provided for the issuance of additional securities secured on a parity of lien with the original warrant issues. U.S. Bank National Associa- tion (U.S. Bank), as successor to SouthTrust Bank, currently serves as Trustee under the Trust Indenture. The Limited Obligation School Warrants were subject to extraordinary mandatory redemption under the Trust Indenture, which required the Commission to make certain certifications regarding the warrants on or before October 20, 2006. No grants were made to any school board until the warrants were no longer subject to extraordinary manda- tory redemption, which occurred during fiscal 2007. There were no grants to the school boards expended during fiscal 2009, 2010 or 2011. The warrants issued under the Trust Indenture were not general obligations of the Com- mission, but represented limited obligations of the Commission, payable solely out of and secured by a pledge of the gross proceeds of the Education Tax as adopted on December 16, 2004, through Ordinance No. 1769. Lease Revenue Warrants In 2006, the Jefferson County Public Building Authority (the Building Authority) issued warrants under the August 1, 2006 Trust Indenture for related capital projects and improve- ments. The warrants were special, limited obligations of the Authority, payable solely from and secured by a pledge of the revenues and receipts delivered by the Authority from the leasing to Jefferson County of the warrant-financed facilities. Interest Rate Swaps In early 1997, Jefferson County had financed the rehabilitation of the sewer system pri- marily through traditional fixed rate debt. Eventually the debt was refinanced using auction rate securities which is variable rate debt. To hedge against increases in interest rates, the Commission entered into a series of interest rate swaps to essentially convert the debt back to fixed rate debt. The swaps called for the county to receive adjustable pay- ments and to pay a fixed rate based on a notional amount of approximately $5.6 billion.
The Expert Witness Dilemma 13
Exhibit 2: Summary of Sewer Debt Transactions 1997–2003
(Adapted from the Financial Statements of Jefferson County, Alabama, Covering Various Fis- cal Years from 1990 through 2012)
Instrument Date Series Original Principal
Amount Indenture February 1, 1997 1997-A Sewer Revenue
Refunding Warrants $211,040,000
1997-B Taxable Sewer Revenue Refunding Warrants
1997-C Taxable Sewer Revenue Refunding Warrants
First Supplemental Indenture
March I, 1997 1997-D Sewer Revenue Warrants
Second Supplemental Indenture
March 1, 1999 1999-A Sewer Revenue Capital Improvement Warrants
Third Supplemental Indenture
March 1, 2001 2001-A Sewer Revenue Capital Improvement Warrants
Fourth Supplemental Indenture
February 1, 2002 2002-A Sewer Revenue Capital Improvement Warrants
Fifth Supplemental Indenture
September 1, 2002 2002-B Sewer Revenue Capital Improvement Warrants
Sixth Supplemental Indenture
October 1, 2002 2002-C Sewer Revenue Refunding Warrants
Seventh Supplemental Indenture
November 1, 2002 2002-D Sewer Revenue Capital Improvement Warrants
Eighth Supplemental Indenture
January 1, 2003 2003-A Sewer Revenue Refunding Warrants
Ninth Supplemental Indenture
April 1, 2003 2003-B Sewer Revenue Refunding Warrants
Tenth Supplemental Indenture 14
August 1, 2003 2003-C Sewer Revenue Refunding Warrants
The various series of warrants (or “parity securities” under the terms of the Indenture) were not identical to one another, either in their intent or structure. Several of the series of warrants were “refunding” warrants issued to refinance previously-issued series of warrants to lower the county’s interest costs and avoid significant rate increases. As of March 2008, the county had approximately $3.223 billion in outstanding sewer warrants. Those warrants fell into the following classes: Variable rate demand $849 million; fixed rate $191 million; auction rate $2.182 billion.
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Exhibit 3: Parties to the Corruption Leading to the Bankruptcy Filing of Jefferson County Alabama
Case: 01-C-200 Filed November 13, 2009 Jefferson County, Alabama 1. JPMorgan (JPM) Securities, Inc. (JP Morgan Chase) served as the manager or co-manager of seven sewer warrant underwritings with Charles LeCroy and Douglas MacFaddin as managing directors from 2001 to 2003. Through LeCroy, MacFaddin and Blount Parrish and Company, JPMorgan funded a series of payments to entice the County to purchase ruinous financial products and services. LeCroy and MacFaddin were rewarded huge bonuses and Blount Parrish received huge cash payments. JPM was counter-party to eight interest rate swap transactions and received substantial fees and unreasonable pricing terms favorable to itself as a result of those actions. On November 4, 2009, the Securities and Exchange Commission (SEC) censured JPM as a result of the conduct. JPM paid fines of $25 million to the SEC and $50 million to the County. JPM synthetically “fixed” the interest expense associated with the variable rate and auction rate debt. JPM Chase was the primary swap counter-party for the interest rate swap transactions associated with sewer warrant issues. JPM, JPM Chase and Blount Parrish were paid millions of dollars as a result of the debt restructure. JPM paid $722,804,000 as a settlement amount to the SEC but admitted no guilt. 2. Charles LeCroy was the managing director of JPM for the Southeast region and was responsible for JPM’s municipal bond business in that area. Douglas MacFaddin resided in Connecticut and was a managing director at JPM and head of the Municipal Derivatives Department. Those two men orchestrated the scheme to gain the County’s business. They implemented that scheme by arranging for payments by JPM to two local broker-dealer firms (paid $250,000 each) that had influence over certain County officials. The firms were told to submit phony “invoices” to create a paper trail to back up the pay- ments. They also paid off other politically-connected firms even if those firms did no work, or virtually no work, in exchange for those payments. The payments were rolled back into JPM’s cost of the related interest rate swap transactions. On November 4, 2009, the SEC filed a complaint against LeCroy and MacFaddin. 3. Blount Parrish and Company, an investment banking firm that specialized in the underwriting and marketing of municipal bonds, had its principal place of business in Montgomery, Alabama. Millions of dollars of payments were made to Blount Parrish as part of the scheme to funnel Jefferson County business to JPM and Parrish. JPM incorpo- rated those payments into the price Jefferson County paid for those transactions. It was estimated that $7 million had been paid in fees related to Jefferson County debt. 4. William Blount was chairman and an owner of Blount Parrish Company. At one time he was Chairman of the Alabama Democratic Party and had known Langford for twenty-five years, since Langford was first elected to the City Council in the City of Birmingham. JPM paid Blount and his companies millions of dollars in connection with the financing transac- tions (Blount received $2.6 million for one transaction). In addition, the County paid him for other work. He received a total of $7 million in commissions and fees. He received a sentence of 52 months in prison and a $1 million settlement charge. 5. Albert LaPierre (age 58) resided in Birmingham, Alabama. He worked as an operative for Blount. He served for twenty-five years as Executive Director of the Alabama Demo- cratic Party and a Democratic lobbyist. He was paid hundreds of thousands of dollars for his role in the activities. He pled guilty in court and agreed to forfeit $371,932 and pay all federal taxes due for 2003 through 2006. He was sentenced to 48 months in prison and a fine of $470,365.
The Expert Witness Dilemma 15
Exhibit 3: continued
6. Larry Langford was President of the Jefferson County Commission from November 2002 through November 2006. In that capacity he served as head of the Finance Com- mittee. He was elected mayor of Birmingham in the fall of 2007. On October 28, 2009, a jury convicted him of 60 counts of bribery, money laundering, conspiracy, mail and wire fraud, and filing a false tax return for accepting money, clothes, jewelry, and other things of value from Blount and LaPierre while Commission President. He was sentenced to 15 years in prison and settlement fees of $361,828. 7. Gary White served as the President of the Commission from 1998–2002. He ran for a fifth term in 2007 but was defeated by Jim Carns. White was found guilty of nine counts of conspiracy and bribery on January 10, 2008 and was sentenced to 10 years in prison and $44,000 in settlements. 8. Chris McNair served on the Commission and on April 21, 2006 McNair was convicted on 11 counts of bribery and conspiracy involving contractors for the sewer project. In 2007 he pled guilty to a twelfth count of conspiracy and was sentenced to 5 years in jail and $851,924 in settlements. 9. Mary Buckelew served on the Commission from 1990–2006. She plead guilty on a single count of obstruction of justice, admitting that she lied to a special grand jury about gifts given to her by investment bankers in 2003 and 2004. She received no jail time and $20,000 in settlements. 10. Other parties to the corruption: Six County employees and fourteen contractors and construction companies were convicted for bribery and conspiracy. Settlements charges ranged from $35,100 to $19,600,000 for a total of $44,791,355. Jail terms varied from four months to 6.5 years.
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Exhibit 4: Formal Proposal by the Jefferson County Commission to Restructure Sewer Debt with Creditors Commonly Referred to as the “Term Sheet”
RESOLUTION WHEREAS, by a resolution adopted by the Jefferson County Commission at a spe- cial meeting held on August 12, 2011, the President and the Finance Chair of the Commission were authorized to engage in direct negotiations with the County’s sewer creditors in an effort to reach a possible settlement of matters relating to the County’s outstanding sewer warrants; and WHEREAS, on behalf of the Commission, the President and the Finance Chair have diligently pursued such negotiations, resulting in the “Proposed Terms and Conditions for Settlement and Refinancing of Jefferson County’s Outstanding Sewer Warrants” dated September 14, 2011 (the “Term Sheet” a copy of which is attached as Exhibit A to this resolution); and WHEREAS, the Commission has confirmed that the major sewer creditors are willing to proceed to a definitive settlement agreement on the terms generally described in the Term Sheet; and WHEREAS, the Governor of the State of Alabama has expressed his willingness to call a special session of the Alabama Legislature, upon execution of the Term Sheet by the County and the sewer Receiver, for the purpose of considering and acting upon the leg- islative needs of the County, including legislation necessary ‘to effectuate the plan of refinancing reflected in the Term Sheet; and WHEREAS, the Commission has reviewed the Term Sheet and has concluded that reso- lution of the issues surrounding the outstanding sewer warrants on the basis described in the Term Sheet, if possible, is preferable to other available alternatives; NOW THEREFORE BE IT RESOLVED BY THE JEFFERSON COUNTY COMMISSION as follow:
1. The Term Sheet is hereby approved by the Commission and the President of the Commission is hereby authorized and directed to execute and deliver the Term Sheet on behalf of the County. The foregoing approval is subject to the continuing condition that no sewer rate increase shall be implemented prior to the Governor’s call of a special session of the Alabama Legislature to address the County’s legislative needs.
2. The President and the Finance Chair, together with the County’s attorneys, are hereby authorized and directed to negotiate and prepare definitive settlement and refinancing agreements to be entered into by and among the County, the sewer Receiver, the Trustee for the sewer warrants, and the participating sewer creditors and warrant holders, and such other documents as shall be necessary or appropriate, all for the purpose of providing a comprehensive and binding plan for the settlement and refinancing of the sewer warrants on terms consistent with the terms of the Term Sheet. Such agreements and other documents shall be presented for consideration and approval by the Commission at a subsequent duly scheduled meeting thereof.
The Expert Witness Dilemma 17
Exhibit 4: continued
Proposed Terms and Conditions for Settlement and Refinancing of Jefferson County’s Outstanding Sewer Warrants
September 14, 2011 FOR SETTLEMENT PURPOSES ONLY; CONFIDENTIAL SETTLEMENT COMMUNICA- TION PROTECTED BY ALA. R.EVID. 408 and FED R. EVID. 408 The terms reflected herein are entirely contingent upon the negotiation and execution by all parties of a comprehensive settlement agreement and related documents, and satisfaction or waiver of all conditions contained in all fully negotiated agreements and documents. Jefferson County (the “County”) and the participating holders of sewer warrants (the “Creditors”) would agree to settle and refinance the County’s outstanding sewer debt based upon the following general terms and conditions to be contained in comprehensive settlement documentation:
1. Refinancing. The parties are engaged in ongoing negotiations and anticipate a settlement in the approximate amount of $2.05 billion to redeem all outstanding sewer warrants (contingent on an additional $.03 billion in creditor concessions from Creditors to be identified in the future). Key provisions of refinancing debt to be issued by a newly formed public corporation (the “Refinancing”) would include the following or other terms and conditions acceptable to the County and appropriate to effectuate the Refinancing: a. 40-year term. b. 1.25x debt service coverage. c. 10% Debt Service Reserve (“DSR”), half of which may be funded (at the Coun-
ty’s option) by a surety bond provided by Assured Guaranty. d. Priority pledge of net sewer revenues. e. Moral obligation covenant by State of Alabama to seek legislative appropriations
to replenish draws, if any, on the DSR. f. Up to $1.0 billion of bond insurance (at the County’s option) provided by Assured
Guaranty. g. Issuance costs paid by County or GUSC (described in section 2 below). h. Closing: No later than June 30, 2012. i. Projected capital needs covered by existing warrant reserves and future cash
flow. 2. Creation of an independent public corporation for management and financing of
the sewer system. The County will seek, with the Governor’s support, legislation in special session to authorize creation of a new form of governmental utility service corporation (GUSC) to serve as the issuer of the Refinancing debt and the operator of the sewer system. a. Majority of GUSC directors to be appointed by Governor based on recommen-
dations from the County; remainder to be appointed by County. All directors to possess appropriate professional credentials as specified in enabling legisla- tion. County to appoint all GUSC directors after Refinancing bonds are satisfied, or refinanced without credit support from State.
b. GUSC will be specifically authorized to file Chapter 9 with consent of the Gov- ernor. GUSC to covenant not to contest treatment of the pledged revenues as “special revenues” as defined in 11 U.S.C. section 902(2). Once the Refinancing bonds are paid or refinanced without credit support from the State, the GUSC will be eligible to file Chapter 9 without the Governor’s consent.
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Exhibit 4: continued
c. System to be transferred or otherwise conveyed to GUSC at close of Refinanc- ing on terms assuring the County’s right to return of the system assets upon satisfaction or payment of refinancing debt. The GUSC shall be prohibited from selling, transferring, creating a lien on, or otherwise alienating the system assets without the prior approval of the County. Notwithstanding the foregoing, the system will only be transferred to the GUSC if such transfer is necessary to effectuate the Refinancing. If the Refinancing can be accomplished without such transfer, the County may determine whether or not to transfer the system assets to the GUSC.
d. Receiver to remain in operating control of the sewer system until closing of the Refinancing pursuant to the Receiver order.
3. Independent Consultants. The Receiver’s financing and operating models, including projections of capital expenditures and operating costs (upon which the County has relied in projecting future sewer rates and in creditor negotiations) may be verified by independent consultants retained by the County. Receiver to pay the reasonable costs thereof from sewer revenues.
4. Rates. It is anticipated that the Refinancing would require approximate rate increases of 8.2% for each of the first three years beginning November 1, 2011 (or as soon thereafter as possible), and future projected annual increases of no more than 3.25% for operating expenses and capital requirements until such time as the debt service requirements related to the Refinancing are met. The Receiver, acting pursuant to the terms of this term sheet, shall initiate the first rate increase immedi- ately upon the County’s approval of this term sheet (which shall occur no later than September 28, 2011). The first rate increase shall be consistent with the terms of this term sheet and the parties’ overall settlement proposals.
5. Environmental Services Department Overhead Charges. All outstanding overhead charges of the County for services to the Environmental Services Department (ESD) shall be paid within 30 days of execution of the binding settlement agreements.
6. Low-Income Assistance Program. The County shall establish and implement a low- income assistance program and/or a rate maintenance program. At its option, the County may allocate creditor concessions to fund either or both programs.
7. Definitive Settlement Agreements. The County, the Receiver, the State of Alabama and representatives of participating warrant holders and insurers will enter into definitive and binding settlement agreements to implement the terms contained herein and any other terms and conditions necessary to affect the Refinancing. The provisions of these agreements shall be acceptable to the County and the other parties and shall include, inter alia, the following terms and conditions to issuance of the Refinancing debt: a. Concessions and discounts on outstanding sewer warrants in an aggregate
principal amount acceptable to the County as set forth in section 1 above. b. Enactment of legislation regarding:
i. GUSC formation and authorization, including mandatory sewer hookups for new construction within specified distance of existing sewer lines, and exist- ing sewer customers.
ii. State moral obligation pledge. iii. Resolution of the General Fund deficiency issues
c. Stay of all civil sewer-related litigation between and among the County and the Creditors pending close of Refinancing.
The Expert Witness Dilemma 19
Exhibit 4: continued
d. Upon Refinancing and based on concessions from Creditors, dismissal with prejudice of all civil litigation and release of all claims involving, by, against and among the County and participating warrant holders related to the system, including but not limited to the Wilson litigation and any litigation involving the County, the monoline insurers and JPMorgan.
e. Negotiation of closing agreement with the IRS covering existing sewer warrants and proposed Refinancing bonds, on terms satisfactory to the County and with no taxes, costs, or other liabilities to existing warrant holders.
f. Judicial validation and confirmation of the Refinancing structure and proposed sewer rate model.
g. To protect the County and the GUSC from market risk of the Refinancing, total annual debt service costs of the Refinancing will not exceed a predetermined debt schedule. The parties may consider additional concessions if market condi- tions change or interest costs rise.
h. Delivery of County’s audited financial statements through fiscal year 2010 by October 31, 2011 and its fiscal year 2011 audited financial statements by Janu- ary 31, 2012.
i. Parties will revert to status quo in the event the settlement agreement is termi- nated and/or the County files Chapter 9 bankruptcy prior to Refinancing.
j. All interest rate swaps still outstanding shall be terminated at no cost to the County.
k. All terms of the Refinancing shall be satisfactory to the County, the GUSC, and the State. The terms of the Refinancing shall also be satisfactory to the Receiver and the participating warrant holders but solely to the extent of the warrant hold- ers’ right to payment and any other rights of any specific warrant holders affected by and as provided in the settlement agreements.
8. Series 2001-B General Obligation Warrants. JPMorgan will (a) waive Approximately 19 million in claims arising from termination of a pari passu swap and accrued and unpaid default interest on such GO Warrants and (b) reinstate the original amortiza- tion schedule applicable to the GO Warrants.
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Exhibit 5: Access to the County’s Financial Statements
The County’s financial statements are too voluminous to be included in this case. How- ever, those statements can be accessed by going to the Jefferson County website at http://jeffconline.jccal.org/ and proceeding through the following series of clicks:
“Departments” “Finance Department” ”Investor Relations” “Financial Information” “Audits and Financials”
Exhibit 6: Overview of FASB Accounting Standards Update 2015-01— Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)
In the early part of 2015, the Financial Accounting Standards Board (FASB) issued a new pronouncement that eliminated the “extraordinary item” classification from the face of the financial statements. That change was allowed to be applied retroactively from the date of the issuance of the new standard. At the time this case was written, the Governmental Accounting Standards Board had taken no action to eliminate the concept of “extraordi- nary items” from financial statement presentation. In early 2015, GASB standards still referred to specific FASB standards for additional information related to the factors to be considered in determining whether or not an item was “unusual and infrequent” in making a decision as to whether a given item was extraordinary. Those FASB standards to which GASB standards referred are summarized as follows: Judgment is required to determine if events or transactions are extraordinary items. An event or transaction shall be presumed to be an ordinary and usual activity of the report- ing entity, the effects of which shall be included in income from operations, unless the evidence clearly supports its classification as an extraordinary item. Both of the following criteria shall be met to classify an event or transaction as an extraor- dinary item:
a. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates. The specific characteristics of the entity, such as type and scope of operations, lines of business, and operating policies should be considered in determining ordinary and typical activities of an entity. The environment in which an entity operates is a primary consider- ation in determining whether an underlying event or transaction is abnormal and significantly different from the ordinary and typical activities of the entity. The environment of an entity includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its opera- tions, and the nature and extent of governmental regulation. Thus, an event or transaction may be unusual in nature for one entity but not for another because of differences in their respective environments. Unusual nature is not established by the fact that an event or transaction is beyond the control of management.
b. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates. An event or transaction of a type not reasonably expected to recur in the foreseeable future is considered to occur infrequently. Determining the probability of recurrence of a particular event or transaction in the foreseeable future should take into account the environment in which an entity operates.
The Expert Witness Dilemma 21
1. See https://www.law.cornell.edu/rules/fre/rule_702, for a brief description about expert witness qualifications.
2. 11 U.S.C. Chapter 9. For more information see: Administrative Office of the U.S. Courts. Chapter 9 “Bankruptcy Basics.” Accessible at http://www.uscourts.gov/ services-forms/bankruptcy/bankruptcy-basics/chapter-9-bankruptcy-basics.
3. The University Faculty Handbook, Section A6.2.3 states: “Outside Responsi- bilities Faculty members are employed to give full-time service to the University during the nine or twelve month period specified by the annual letter of agree- ment. However, the University recognizes the value of involvement with professional activities outside the University and permits its faculty to accept reasonable short-term employment related to the one’s discipline. School deans are responsible for monitoring the impact of such activity and controlling it. Any outside employment within this time, including a professional consulting relationship, requires written permission from the provost based on a request for outside employment recommended by the school dean.”
4. An indenture contract is a legal agreement that specifies the terms of the lend- ing as well as the responsibilities of the borrower and lender(s).
5. Only a “municipality” may file for relief under Chapter 9. 11 U.S.C. § 109(c). The term “municipality” is defined in the Bankruptcy Code as a “political subdi- vision or public agency or instrumentality of a State.” 11 U.S.C. § 101(40). The definition is broad enough to include cities, counties, townships, school districts, and public improvement districts. It also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities. See http:// www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter- 9-bankruptcy-basics, for a broad overview of Chapter 9 bankruptcy information.
6. See “The History of the Jefferson County Sanitary Sewer System” report pre- pared for the Jefferson County Commission by the Public Affairs Research Council of Alabama, November 2001 for a detailed account of the sanitation problems faced from nearly the inception of the County.
7. United States v. Jefferson County, Alabama, et al. United States District Court for the Northern District of Alabama, Civil Action No. 94-G-2947-S.
8. The Bank of New York Mellon v. Jefferson County. United States District Court for the Northern District of Alabama, CV 2009–2318. Receiver’s first interim report on finances, operations, and rates of the Jefferson County sewer system.
9. See Exhibit 1 for a definition of debt instruments. Warrants are more often referred to as “bonds” by financial professionals (the terms bonds and warrants are used interchangeably).
10. Securities and Exchange Commission v. Charles E. LeCroy and Douglas W. McFad- din. Case No. CV09-U-2238-S, U.S. District Court, ND Ala.
11. The Jefferson County, Alabama filing of approximately $4 billion was the larg- est municipal bankruptcy at the time of the filing. Since then, the bankruptcy filing of the City of Detroit in July of 2013 of an estimated $18 billion sur- passed the Jefferson County, Alabama filing.
22 Case Research Journal • Volume 36 • Issue 1 • Winter 2016
12. Church, Stephen. “Alabama’s Jefferson county Enters Biggest Muni Bankruptcy as Crisis Victim,” Bloomberg, November 10, 2011. http://www.bloomberg. com/news/2011-11-09/alabama-s-jefferson-county.
13. Interview with David Carrington, president of the Jefferson County Commis- sion, May 16, 2013.
14. Ibid. 15. Securities and Exchange Commission v. Charles E. LeCroy and Douglas W. McFad-
din. Case No. CV09-U-2238-S, U.S. District Court, ND Ala. 16. Faulk, K. (2015, October 30). “Prison Sentence Ends for JeffCo Sewer Con-
tractor; 3 More to Go.” Retrieved from http://www.al.com/news/birmingham/ index.ssf/2015/10/jeffco_sewer_contractor_ends_p.html?hootPostID=1898d3 304b9bb2176d3fcd0fc619dff3.
17. Sigo, S. “Alabama Raises a Question: When Is a GO Not a GO?” (2012). The Bond Buyer, (F320).
18. Interview with David Carrington, president of the Jefferson County Commis- sion, May 16, 2013.
19. Wright, B. (2010, September 23). “Receiver Appointed Who Can Raise Jefferson County Sewer Rates.” Retrieved from http://blog.al.com/spotnews/2010/09/ receiver_appointed_who_can_rai.html.
20. The Bank of New York Mellon v. Jefferson County. United States District Court for the Northern District of Alabama, CV 2009–2318. Receiver’s First Interim Report on Finances, Operations and Rates of the Jefferson County Sewer Sys- tem. John Young, Receiver. (2010).
21. Woodley, Melissa, “Flushed Away: Jefferson County, Alabama’s Sewer Debt Crisis.” Journal of Applied Finance. No. 1, 2012.
22. Trust Indenture between Jefferson County, Alabama and AmSouth Bank of Alabama. Dated as of February 1, 1997.
23. “Trust Indenture,” pp. 8–9.
BE&K Engineering. 2003. “Jefferson County Program Review.” The Bank of New York Mellon v. Jefferson County Alabama. Circuit Court of Jefferson County, Alabama. Case No. 2009-2318.
Church, Stephen. “Alabama’s Jefferson County Enters Biggest Muni Bankruptcy as Crisis Victim.” Bloomberg November 10, 2011. http://www.bloomberg.com/nes/ 2011-11-09/Alabama-s-jefferson-county.
Horn, R. C., and J. W. Williams Jr. 2010. “Re-Structuring Jefferson County Govern- ment to Minimize the Risk of Poor Financial Decisions.” Cumberland Law Review 40 (No. 3): 855–877.
Public Affairs Research Council of Alabama. “The History of the Jefferson County Sanitary Sewer System.” November 2001.
Securities and Exchange Commission v. Charles E. LeCroy and Douglas W. MacFaddin. U.S. District Court Northern Division of Alabama. Case No. CV-09-B-2238-S.
The Expert Witness Dilemma 23
Securities and Exchange Commission Administrative Proceeding. File No. 3-13673 (2008).
The Bank of New York Mellon v. Jefferson County. U.S. District Court for the North- ern District of Alabama. CV 2009-2318. “Receiver’s First Interim Report on Finances, Operations, and Rates of the Jefferson County Sewer System.” John Young, Receiver. (2010).
United States v. Jefferson County, Alabama et al. United States District Court for the Northern District of Alabama. Civil Action No. 94-G-2947-S (1996).
Woodley, Melissa. “Flushed Away: Jefferson County, Alabama’s Sewer Debt Crisis.” Journal of Applied Finance. No. 1, 2012.
http://www.bondbuyer.com/issues/121_100/jefferson-county-alabama-bankruptcy- general-obligation-bonds-10400055-1.html. Retrieved December, 2012.
www.gasb.org. On the front page a reader can access all of the standards issued by GASB, including Standard 58 and Standard 34, by clicking the “Standards and Guidance” icon found on this front page.