The New York Times
By: Campbell Robertson & Mary Williams Walsh
July 29, 2011
BIRMINGHAM, Ala. -- A few hundred miles north of here, politicians are fighting over debt. It is a spirited debate, full of discussions about what kind of country will be left for future generations and pledges not to kick the can down the road.
But one does not have to go far to see that possible future. Welcome to Jefferson County. This is the end of the road, where the can cannot be kicked any farther.
There are lessons for everyone here, and they are all painful: lessons for those who are not concerned about the prospect of mounting debt, for those who insist that steep cuts can be relatively painless, for those who think the bill for big spending can safely be put off into the future, for those who have blind faith in the market and for those who think the government can always be relied upon to protect the interests of the people.
All of these beliefs have led to a place where the government can no longer borrow and the little cash on hand is being demanded by creditors, where the Sheriff's Department cannot afford to respond to traffic accidents and hundreds of county workers are sitting at home, temporarily or possibly permanently out of work. They have also led to a widely held conclusion among residents that no one is on their side.
"I get tired of them dumping on the little people," said Deb Passmore, 58, who had to shut down her Laundromat several years ago when the sewer and water bills reached $500 a month.
The prospect of county bankruptcy, which would be the largest of its kind in United States history, has gone from being an unwelcome mark of distinction to something that many residents insist should have happened a long time ago.
It still stings to think about how things got this way, how county residents are stuck with the tab from a reckless binge by Wall Street bankers, middlemen and crooked politicians, a greed-fueled spree that none of the voters actually wanted or even knew was happening. But residents know that complaints about fairness have not made that debt, all $3.2 billion of it, go away.
"What are you going to do?" said Steve Mordecai, 50, who was eating lunch at Ted's, a meat-and-three place here that is somewhat less crowded than usual on Fridays, given that so many county employees are no longer working. "The county created the mess," Mr. Mordecai said. "Now we have to pay it back."
The story that ends in overspending excess began in neglect: in 1996, the federal government accused Jefferson County of sending raw sewage into area rivers and demanded that it rebuild its dilapidated sewer system. Such a project would be costly, but officials hoped to avoid unpopular rate increases first by pushing that cost into the future, and then by adding a maze of derivatives that were supposed to shield the county from interest-rate increases.
But the bond deals were fraught with pay-to-play scandals. Four county commissioners were convicted of taking bond-related bribes. Two bankers are fighting federal accusations that they made secret payments, and in 2009 J.P. Morgan forfeited $752 million to settle a complaint by the Securities and Exchange Commission.
The complicated bond-and-derivative structures failed during the financial turmoil of 2008, leaving the county with a $3.2 billion debt to pay, faster than planned. Sewer revenues that were pledged to pay the debt cannot keep up. The problems keep compounding: federal prosecutors have taken a derivatives consultant to court on bid-rigging charges. And the Internal Revenue Service is investigating whether the sewer bonds really should have been marketed as tax exempt.
But the fiscal crisis went from a simmer to a full boil in April, when the Alabama Supreme Court declared a major county tax unconstitutional. Shortly afterward, with the county reeling from the severe shortfall in general funds, a court-appointed receiver recommended a steep increase in county sewer rates, and also laid claim to the county's only cash reserves, saying they were needed to bolster the sewer system's finances.
At the end of June, Gov. Robert Bentley declared a shaky truce while negotiations took place. On Thursday, the County Commission announced that it was entering a seven-day standstill period to consider a settlement offer from the creditors, an announcement that was met with grumbles across most of the county.
"They should have filed for bankruptcy 10 years ago," said Howard Faulk, an owner of Sophie's Deli across the street from the county courthouse, where the lines for county business are hours long but the parking is free because the county cannot afford parking attendants. "If you're standing in water this deep," Mr. Faulk asked, his hand at his neck, how much deeper can it get?
But any residents who think a bankruptcy will simply wipe the debt clean are probably in for a bleak surprise. Chapter 9 of the federal bankruptcy code, the one local governments use, does not work like Chapter 11, where corporations restructure and bondholders routinely suffer losses.
In fact, Chapter 9 was amended in 1988 with the specific goal of making clear that certain types of municipal bonds would keep on paying even in bankruptcy, said James E. Spiotto, a bankruptcy specialist with the firm of Chapman Cutler. The bonds issued to finance Jefferson County's giant sewer project are this type.
"The whole purpose is to assure the market that in times of distress, the bonds will be paid," Mr. Spiotto said in an interview.
Many citizens of the county speak bitterly of a perception that other parts of Alabama think of the county as unworthy of help. Even one of the county's own state senators blocked a plan to allow Jefferson to raise revenue to replace some of what was taken away by the April court decision, thus forcing layoffs.
"In Alabama, Jefferson County is Chinatown," said David Mowery, a Montgomery political consultant, using the metaphor for hopeless inscrutability from the Roman Polanski film of the same name. "Forget it," he said, summing up the general attitude toward the county. "There's nothing you can do about it."
But as Alabama's own governor learned over the spring and summer, you cannot just forget Jefferson County, where Birmingham is the county seat. If it goes down, it takes the state -- and the state's credit -- with it. This realization prompted the governor to intervene when the county was near declaring bankruptcy at the end of June.
Still, little of this reassures the people slogging through here, who realize that life will get harder before it gets better. The only consolation is gallows humor and signs they might not be alone.
"I used to think what awful leadership we have in Jefferson County," said Phillip Winette, 58, who runs a printing company. "But now I'm watching the debate on a national level. It's an epidemic."
Campbell Robertson reported from Birmingham, and Mary Williams Walsh from New York.