Taint of Political Corruption Wafts from Jefferson County Bankruptcy

Taint of Political Corruption Wafts from Jefferson County Bankruptcy
November 22, 2011

Jefferson County, Alabama’s financial struggles have taken the local government into the largest municipal bankruptcy in national history as nearly two dozen persons associated with the county’s financial troubles have been convicted of criminal conduct.

Jefferson County, which includes the city of Birmingham, filed for bankruptcy Nov. 9, with more than $3.2 billion in debt.

The county has been under financial strain since 2008 because of a pyramid of debt that started with an EPA-mandated repair of the sewer system. Costs were inflated by corrupt politicians, bribes, and subprime loans.

As of October, it seemed the county would avoid bankruptcy by striking a deal with its creditors, the most prominent being financial firm J.P. Morgan. The deal included cutting approximately $1 billion from the debt.

Messy Tangle

State Rep. John Rogers (D), whose district includes Jefferson County, said the creditors changed the terms to which county officials thought they had agreed. And “because they had no deal on the table at that time, all they could do was file Chapter 9 bankruptcy.”

George Singleton, a county ratepayer who sends research reports on the case to Rogers and other legislators, said it was virtually impossible to reach a deal because "you had such a mess and tangle of pension funds, insurers, guarantors, and bank creditors." He said the Chapter 9 bankruptcy will force all those other players to appoint a single negotiator.

Not everyone is so happy about the bankruptcy. Senior Market Strategist Daniel Berger of Thomson Reuters says, "I think there's going to be pain no matter what transpires."

Corruption Convictions

Twenty-two people have been convicted on corruption charges connected to 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.

A key and controversial plank of the recently failed deal with creditors was sewer-rate increases overseen by the state-court-appointed receiver, John Young.

Rate Dispute

Berger said for the county to meet its obligations, "They really have to raise rates a lot. And they haven't raised rates to the extent that they need to."

Rogers said the problem can be solved without a rate increase.

“Basically, a lot of the increase is corruption and fraud committed by J.P. Morgan and several other people involved,” Rogers said. “So why should the ratepayers have to pay for the fraud and bribery?”

Young said believing the county can avoid rate increases and repair the sewer system to EPA standards is "naive."

Key Decision

Berger said one aspect of the case many people would be closely watching is whether Young retains his powers as receiver or is removed by the federal bankruptcy court.

He said removing Young would have “a profound impact. He has a really good handle on what's going on there. And it could really have a chilling impact on the municipal bond market."

On Nov. 21, U.S. Bankruptcy Judge Thomas B. Bennett announced he would allow Young to remain. He added, though, that he could later decide to limit Young’s powers.

Young has been criticized for his $500-an-hour wage and alleged conflicts of interest. Jefferson County’s legislators have unanimously expressed their support to remove Young.

Young could not be reached for comment.

State Intervention

Part of the failed deal with creditors hinged on the state guaranteeing the county’s debt. Rogers is glad that the governor “backed down” on this provision when he saw the breadth of opposition.

Berger said the state will “have to play more of a role than they're playing now, because I think they're going to see that the market otherwise may penalize issuers in the state of Alabama.”

Berger said he believes municipal bankruptcies are rare and will remain so.

Douglas French, president of the Alabama-based Ludwig von Mises Institute, said it’s “hard to know what kind of financial shape many municipal debt issuers are in, because they are not quick to update their financial statements.”

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