Smelly Alabama Sewer Deals Could End in Record Municipal Bankruptcy

Smelly Alabama Sewer Deals Could End in Record Municipal Bankruptcy
October 11, 2011

Alabama's Jefferson County is "teetering on the edge of bankruptcy," says Jefferson County Commissioner Jimmie Stephens. The county is $3.14 billion in debt as a result of sewer construction and financing deals tainted by corruption.

In September, county commissioners voted 4–1 to approve a repayment agreement that includes $1.1 billion in concessions from creditors. But the agreement, Stephens said, "requires cooperation from our state delegation and the state legislature, working in conjunction with the governor's office."

If that fails, Jefferson County will undergo the largest municipal bankruptcy in U.S. history.

Rate Increases

Commissioner George Bowman, the 1 in that 4–1 vote, said the new deal is "Balancing the books on the backs of the poor" because it requires large rate hikes, potentially for decades.

Sewer rates are now 329 percent of what they were in 1999, and the new deal begins with further increases of 8.2 percent each year for the first three years.

 Nearly 70 percent of the sewer ratepayers live in Jefferson's districts 1 and 2, which are largely low-income.

Criminal Convictions

Twenty-two people have been convicted on corruption charges in the ongoing SEC investigation into the case. Among them are four Jefferson County commissioners, including Larry Langford, who was elected mayor of Birmingham in 2007. Langford is serving a 15-year federal prison sentence for accepting $236,000 in bribes in connection with refinancing the sewer debt in 2002.

George Singleton, a sewer ratepayer and ex-New York banker, has been following the case closely. He said financial services firm J. P. Morgan, which was both a broker and creditor bank in the corrupt deal, has settled the SEC civil case by paying $75 million in penalties and writing down more than $647 million in the county's debt.

The state judge in the civil suit between banks and the county has appointed John Young, who has prepared reports for the federal and state courts in this case, as receiver of the Jefferson County sewer system. This gives him authority over rate increases.

Jefferson County has retained Kenneth Klee, who served as an advisor in Orange County, California's 1994 municipal bankruptcy filing, currently the largest ever.

"Ken is very much involved in everything we're doing right now, because we still have to do the General Fund fix,” Stephens said. The county's General Fund is almost $40 million in the red.

Division Over Agreement

Gov. Robert Bentley (R) supports the negotiated settlement for the sake of "economic development in Jefferson County and to avoid a negative reflection on the rest of the state,” said his press secretary, Jennifer Ardis.

She said the governor’s office could not say whether bankruptcy would increase borrowing costs for other Alabama municipalities.

"We do not actually know exactly what bankruptcy would mean for the rest of the state. The governor wants to avoid it altogether,” Ardis said.

State Rep. John W. Rogers, Jr., (D) whose district includes Jefferson County, said he is "totally opposed" to the rate increases in the settlement, saying it would be "cruel, inhumane, and insane" to force these costs on the ratepayers.

Bowman blamed corrupt bankers for the county's financial crisis, calling them "the people who poisoned the well in the first place." The ratepayers, he said, had "nothing to do with it."

The original 1997 sewer loans were refinanced into sophisticated Wall Street derivatives in 2002. When the subprime-loan market collapsed in late 2008, it took Jefferson County and its guarantors down too.

Conflict of Interest Allegations

In a letter emailed to commissioners and legislators on Sept. 28, Singleton stated his hope that Young be removed as sewer system receiver “due to … documented monetary gain conflicts of interest."

Young is a former executive of American Water Works. Singleton wrote, "Several Creditor banks on our sewer bonds are stockholders in and of American Water Works Co., chief among them JPMorgan Chase Bank."

In his capacity for the court, Young has paid American Water employees at least $95,175 for their research and reports. Meanwhile, according to Singleton, "a good ballpark number" for Young's stock ownership in American Water is 198,035 shares.

Young responded to this last claim tersely: "That number is incorrect."

Regarding the hiring of his former colleagues, Young explained, "I brought them in for their expertise because they have the ability to assess things here and make things run as efficiently as possible, in a very cost-effective way."

He added, "they haven't been down here working in the last six months."

Previous Questions

This isn't the first time Young's impartiality has been questioned here. In 2009, Commissioner Jim Carns said a court report written by Young was invalid because “his company seeks to purchase or manage the county’s sewer system.”

Young said the allegation is “absurd.” He added, “American Water has no interest in doing that."

More Municipal Bankruptcies

Doug French, president of the Alabama-based Ludwig von Mises Institute, said "bankruptcy is the only option" for Jefferson County.

"Perhaps a case can be made that those in Jefferson County government who inked this deal should pay, but not innocent citizens who must rely on government for sewer service. Morgan and their investors should take their licking and move on."

French also said, "Municipal bankruptcies will be numerous in the coming years as tax revenues will never be able to pay the pension obligations of the municipalities."

Mike Reid (mikereid@mises.com) writes from Manitoba, Canada.