Jefferson County Stares Down Bankruptcy as Citizens Tire

Jefferson County Stares Down Bankruptcy
People ask Jefferson County Revenue Department's Eugene Pitard, right, questions about the ongoing budget crisis. Photographer: Jeff Roberts/The Birmingham News/AP

Call it sewer fatigue.

As Jefferson County, Alabama, meets today to decide whether to declare a record U.S. municipal bankruptcy, some citizens, politicians and businesses embraced the move. They said it would begin resolving a three-year-old, $3 billion-plus debt crisis and provide leverage over creditors that would offset the damage to the county’s finances and reputation.

“People are tired of reading about the sewer crisis and tired of hearing about rate increases,” Tony Petelos, mayor of Hoover, a city of 81,619, said in an interview in his office. “People, including me, want to see this come to an end, even if it’s bankruptcy. This has been a dark cloud hanging over this county and this city for more than three and a half years.”

An offer from creditors last night may delay the bankruptcy decision. John Young, a court-appointed receiver for the sewer system, said this morning that he considers the proposal “a good offer” and that he would be willing to extend a standstill -- now set to expire tomorrow night -- for seven days to allow commissioners to examine it.

“There are a lot of issues in this offer,” he said. “There are a lot of things that need to be considered, including legislation issues and litigation issues.”

Bond Refinancing

Jefferson County, home to Birmingham, Hoover and more than 658,000 residents, has been under fiscal stress since a sewer-bond refinancing collapsed more than three years ago during the credit crisis. Then, the Legislature refused to act after a court in March struck down a tax on wages. The levy generated about a quarter of Jefferson’s general-fund revenue. Losing it meant unpaid leave for more than 500 of its 2,000 employees.

Today, the five-member County Commission meets to consider bankruptcy -- a day before a U.S. Securities and Exchange Commission hearing in suburban Homewood on municipal-bond regulation.

The county has proposed that creditors including JPMorgan Chase & Co., which holds most of the bonds, agree to reduce the debt to about $2 billion. Justin Perras, a JPMorgan spokesman, declined to comment on the situation yesterday.

Commission President David Carrington said he expected to see a settlement offer before today’s meeting at 1 p.m. local time. If an acceptable deal doesn’t transpire, the county might file for bankruptcy as soon as midnight July 30, he said.

‘Pull the Trigger’

“My constituents are saying, ‘Pull the trigger,’” Commissioner Sandra Little Brown said at a meeting July 26.

Commissioner Joe Knight also said the people he represents are fed up: “They are ready for bankruptcy,” he said in an interview that day. “I caution them that bankruptcy is uncharted territory. The lure is that it would handle everything in a more organized way. We have been wandering in the desert all these years.”

Bankruptcy wouldn’t erase the debt. Instead it would provide a judicial forum for adjustments, which might take years. The San Francisco Bay city of Vallejo, California, entered bankruptcy in May 2008, as the recession eroded tax revenue and unions rejected wage cuts. It may exit bankruptcy today, more than three years later, after spending more than $10 million on legal fees.

At Jefferson County’s downtown Birmingham headquarters, a sign on the door demonstrates the decline of services that helps drive pro-bankruptcy sentiment: “Revenue line starts at the Lynn Park side,” it says in bold black letters. “Tags: Same line.”

Stalled Projects

In interviews this week, residents spoke of long waits for license-plates, grassed-over hulks of half-started road expansions, threatened double-digit sewer-rate increases and sheer exhaustion.

“I think they should just go into bankruptcy and get it over with,” said Sophia Faulk, who has owned and operated Sophia’s Deli in downtown Birmingham for 22 years.

Faulk and her husband, Howard, said they’d lost business, regulars and friends to the cutbacks, including patronage from jurors at the adjacent courthouse as the number of juries seated plunged from 31 a year to 15.

“This business used to be fun,” she said. “It isn’t anymore.”

E. Wayne Sullivan, director of the county’s engineering department, said his workforce went from 393 to 114. Complaints have been rolling in and he expects an increase now that the county is finished picking up debris from April tornadoes and people “begin to notice what kind of shape the roads are in.”

Lost Investment

In suburban Hoover, Petelos said the city lost at least one investor who abandoned the idea of buying commercial property after learning it would have to use Jefferson’s sewer system.

The seeds of the crisis were planted in 1996 when the federal government ordered the county to improve water quality.

It embarked on a $3 billion borrowing binge without a plan to repay the debt, according to a report by Young, the receiver who took charge of the sewer system in September after bond insurers sued the county.

To postpone rate increases, the county pushed bond payments into the future. In 2002 and 2003, when debt service began to increase, the county hired JPMorgan to refinance the debt, converting fixed-rate debt into floating-rate bonds.

The financing and construction were rife with corruption. Larry Langford, a former commissioner and Birmingham mayor, was convicted of accepting bribes for arranging the refinancing and is serving a 15-year sentence. Two of his associates pleaded guilty, and two JPMorgan bankers are fighting Securities and Exchange Commission charges that they made $8 million in undisclosed payments to friends of commissioners.

In 2009, JPMorgan settled allegations that it violated securities regulations, agreeing to cancel $647 million in fees.

Yesterday, a Jefferson County sewer bond maturing in 2027 traded in a range of 58.3 cents to 69.6 cents on the dollar.

Sudden Rage

For the past three years, the county has negotiated off and on with its creditors. Then, in June, Young released a report recommending a 25 percent sewer-rate increase. Under the plan, the average residential wastewater bill would increase to $46.88 a month from $37.74, after quadrupling since 1997.

“People were outraged, absolutely outraged,” Petelos said.

Ronnie Acker, president of the Bessemer Area Chamber of Commerce in the county’s western part, said that many of his members -- most of them small businesses -- wish bankruptcy had come three years ago.

‘Drag On’

“We’d be out of this by now,” Acker said in a telephone interview. “Letting it drag on and on and on hasn’t done a thing to help Jefferson County or the state of Alabama.”

The Birmingham Business Alliance, which represents 1,200 firms in the seven-county metro area, has no official position on a filing, said its president and chief executive, W. Brian Hilson. He said he wasn’t in favor.

“I would prefer the county work through the issues with creditors, begin restoring services and most importantly make the creditors whole,” he said.

The entire state would have to live down an image of financial instability, he said.

When the SEC convenes its hearing in Jefferson County tomorrow, topics will include disclosure, derivatives and distressed communities.

Jefferson County commissioners plan to attend.

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