Six Months Into Alabama County Bankruptcy, Services Fray

In Alabama’s most populous county, twisted tree limbs are strewn on the ground months after a tornado ripped them down. Potholes pockmark roads and parking lots, including one the size of a pizza that swallowed the county manager’s front tire. Government credit cards were rejected when maintenance workers tried to buy supplies.

These are symptoms of the financial collapse of Jefferson County, population 660,000, which six months months ago filed a record $4.2 billion municipal bankruptcy. The county’s inability to provide services once taken for granted is becoming increasingly noticeable as hundreds of workers leave.

“The county is just falling apart,” said Judy Hall Collins, a Jefferson County real-estate agent. She said she struggles to persuade buyers to look at houses in Jefferson. “There’s a stigma now. It seems like you hear about something else every day.”

Debate over the idea that government takes in more revenue than it needs, and wastes too much of it, has come to define modern politics. Americans for Tax Reform, a Washington group led by anti-tax advocate Grover Norquist, says on its website that it has collected pledges from 279 members of the U.S. House and Senate that they won’t raise taxes. The unraveling of Jefferson, home to the city of Birmingham, provides an unusual opportunity to see what happens when a government suddenly loses a fourth of its income.

Bond Penalty

Municipalities in Jefferson are straining to pay for services the county used to provide. Cities and towns in the state also pay a penalty as investors demand extra yield to buy the region’s debt. Issuers in or near Jefferson County may pay an extra 0.10 percentage point to borrow, said Mike Dunn, managing director at Merchant Capital LLC in Montgomery.

The county missed a $15 million general-obligation bond payment and says it can’t pay any more unless state lawmakers break a legislative deadlock to allow local officials to impose new taxes. The state Senate last week agreed to allow an increase, and the House is considering a similar measure.

If lawmakers don’t act, the county is preparing to make more cuts, among them eliminating meal delivery for the elderly poor and building inspections, said County Commissioner Jimmie Stephens.

Financial Deterioration

Jefferson County’s financial demise began more than three years ago, the result of corruption and bad bond deals involving its sewer system. The situation worsened last year, after the state Supreme Court struck down a wage tax that had generated about $70 million per year -- a quarter of the county’s revenue.

The county’s budget this year is $217 million, down from $312 million in 2010, a 30 percent decrease.

The county began its fiscal year with a $40 million revenue shortfall, though officials say they have lowered that by eliminating jobs. The county cut 800 of 3,500 in the past year.

Jefferson filed for bankruptcy in November after lawmakers failed to deliver their part of a September bargain struck with holders of the sewer debt, led by JPMorgan Chase & Co. (JPM) The agreement required the Legislature to create an authority to oversee the system and improve the revenue situation.

The county’s distress is mounting. Its hospital for the indigent ended cancer and pregnancy care. Its website disappeared for two days in April after one of the employees who maintained it left.

Credit Cards

Stores temporarily stopped accepting county charge cards after its credit limit was cut without warning, said Jeff Smith, the general services director.

The county didn’t have enough staff to open envelopes containing residents’ property-tax payments. It had to get help from the state.

The wait for license plates at the courthouse in Birmingham increased after the county closed three other offices. The line often snakes into a square lined with live oaks, where the county has installed two portable toilets to accommodate those waiting. In February, two elderly residents waiting in line fainted and were carried away by ambulance.

Jefferson relented and opened one of the shuttered offices last month, with a pothole outside. County Manager Tony Petelos, who arrived for the opening, said a tire on his Chevy Tahoe rolled into it, causing a “tremendous thud.” The county later repaired the hole.

Employees Quit

Employees are fleeing, Petelos said.

“We are downsizing weekly,” Petelos said. “They’re taking other jobs, retiring early.”

Cities within Jefferson are paying for more police to make up for fewer county patrols and trying to keep up with road repairs. Jefferson did little to pick up debris after a twister hit in January, reversing its previous practice.

“The only source of debris pickup was two pickup trucks for thousands of cubic yards of destruction,” said Kenny Clemons, executive director of the Jefferson County Mayors Association, which represents mayors from 32 cities in Jefferson.

In 8,400-resident Fultondale, the city has added five workers to its 55-person payroll handle jobs previously done by the county. The city has been paying for extra work out of its reserves, which it will be able to do only for about another year, said Mayor Jim Lowery. Fultondale applied for a one-time federal grant to fix a road that the county previously repaired.

Jefferson’s Jails

“We would never have had to pave a road like that,” Lowery said. “It would be like the federal government saying ‘We’re not going to do the interstates anymore. Here, they’re yours.’”

“I realize now how much the county was carrying us,” Lowery said. “We counted on them.”

At the county’s jail in Birmingham, there are about 1,200 inmates in a building designed to handle 968 -- the result of Jefferson’s inability to operate a second jail 14 miles (23 kilometers) away. Some floors are 40 percent beyond their capacity.

Conditions are dangerous, said Captain Ron Eddings, a jail supervisor.

“It was unheard of here to have an inmate put his hands on a guard,” he said. “We have had three deputies badly beaten already this year. We had no legitimate rape reports in the four years I’ve operated the jail. This year we’ve had four.”

Single Officer

A single corrections officer in a booth watches inmates wearing black-and-white striped uniforms in four glass-walled wards. Built for 12 prisoners, each holds about 40. Two officers used to staff the booth.

At night, four men sleep in 10-by-7 foot cells built for one.

“That’s my mat and that’s my space there,” said Terry Joe Allen, 32, who was in jail for driving without a license. he pointed to an area near the toilet. “Can you believe it?”

The other jail, in Bessemer, sits empty, except for a few inmates who pass through for several hours at a time awaiting hearings in a neighboring courthouse.

The county can’t pay to operate the 415-bed facility. It was closed in 2009, as the county’s financial difficulties escalated.

Bunks are being used to store confiscated illegal bingo machines. In a kitchen built to feed hundreds, steel tables are empty and spotless, and pots and pans dangle from racks overhead.

Expanding Government

The county’s budget expanded too much when times were good and should now contract instead of raising taxes, said Representative Arthur Payne, a Republican from Jefferson County.

“The county needs to balance their budget,” Payne said. “That’s what families and businesses do when you lose revenue.”

County officials said they have made the government more efficient as they cut. Without new taxes, “I don’t know if the government can actually run,” said Stephens, also a Republican.

If the Legislature lets the county raise taxes, it will probably reinstate the wage tax, Petelos said. Some revenue may be used to restore services, though Petelos said the county hasn’t decided which ones.

Tax money would also be used to make payments on general- obligation bonds. The bill moving the Legislature wouldn’t allow money from a new tax to cover sewer-bond payments. Jefferson is paying sewer-bond holders only what’s left over after operating expenses, which hasn’t been enough to make full interest payments.

People and businesses are avoiding the county -- or leaving.

“You have people thinking about placing a regional office, and they’re going to ask what is going to happen to Jefferson County,” said Stan Smith, a real-estate agent in Birmingham. “And we can’t tell them. So they go to another county, or Mississippi.

Collins, the Jefferson real-estate agent, said she asked about 100 colleagues at a conference last month to raise their hands if they thought the county’s struggles hurt sales.

Every hand in the room went up, she said.

To contact the reporter on this story: Margaret Newkirk in Birmingham, Alabama at mnewkirk@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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