Aug. 18 (Bloomberg) -- A settlement that would let Jefferson County, Alabama, avoid the largest municipal bankruptcy in U.S. history hinges on help from a legislature that so far hasn’t been willing or able to offer it.
Even Jefferson’s own lawmakers are divided over Governor Robert Bentley’s proposal to offer the state’s moral obligation to back a restructuring of the county’s $3.14 billion sewer debt, and on how and whether to bolster its general fund. Both measures are critical to keeping the state’s most populous county afloat, according to officials there.
Just one local lawmaker can derail a deal, according to rules for county-specific bills. It happened most recently in June, when Republican Senator Scott Beason of Gardendale killed a measure that would have let Jefferson replace a wage tax that a court struck down, gutting its general fund.
“I was opposed to it then and I’m opposed to it now,” Beason said in a phone interview last week.
Jefferson County, home to Birmingham and more than 658,000 residents, has been in fiscal straits since a sewer-bond refinancing collapsed more than three years ago during the credit crisis. The refinancing involved what court-appointed receiver John Young described in a report as a borrowing binge to pay for improvements ordered by the federal government.
The project and its financing were rife with corruption. Four county commissioners, six former employees, several contractors and businesses and two investment bankers have been convicted of bribery and conspiracy, Young’s report said.
The goodwill of Alabama’s Legislature is an unknown as the county tries once more to settle with creditors including JPMorgan Chase & Co. Poised to file bankruptcy last week, the five-member commission agreed to negotiate 34 more days at Bentley’s request. Bentley promised to call a special session and to lobby legislators for help.
Any settlement will be contingent on that assistance, commissioners have said.
That means the county and its creditors must rely on a body traditionally hostile to and envious of the Birmingham area, according to William Stewart, emeritus professor of political science at the University of Alabama in Tuscaloosa.
Contributors to the tension are Alabama’s fraught racial history, a divide between country and city and the area’s economic dominance, he said.
“In terms of their sympathy with the problems of Jefferson County, I don’t think they have any,” Stewart said of the Legislature. “We used to call it the imperial county.”
He said the Legislature will deliver if Jefferson County presents a united front, which won’t be easy to assemble. Racial, party and economic divides have created a delegation that is “very, very split. They have been for years.”
The Legislature is also embroiled in a corruption scandal of its own. Two sitting and two former senators, two lobbyists and three others were accused of bribery related to bills to allow electronic bingo in the state. None were convicted; two were acquitted while the other seven may face a second trial.
Testimony in the case showed that lawmakers -- including Beason -- wore recording devices at prosecutors’ request to catch their colleagues breaking the law.
Paul Glass, co-owner of Republican political consulting firm Southern Insights in Birmingham, said that Jefferson County’s delegation will be unable to unite around any bill allowing it to raise more revenue, thanks in part to the corruption surrounding the sewer deal.
“Voters don’t trust the Jefferson County Commission with new revenue,” Glass said in a phone interview. “We finally have an honest County Commission. It’s not their fault. You actually have a group working together that’s trying to get this thing solved, but the perception is so bad.”
A settlement offer from creditors that Jefferson commissioners rejected last week laid out the bones of Bentley’s legislative agenda.
The document, released Aug. 12, says the governor supports laws creating an independent public corporation to own and finance the system; authorizing the state’s moral obligation backing for a $2.07 billion refinancing of the sewer debt, or about 33 percent less than the amount outstanding; requiring new developments and those with failed septic tanks to hook up to the sewers to increase the number of customers; and to solve -- somehow -- the county’s general-fund shortfall.
The moral obligation, which the creditors’ proposal said would be worth $1 billion in reduced interest rates, may be a hard sell elsewhere in the state, according to Jefferson County representatives Jack Williams, a Republican, and John Rogers, a Democrat. The state wouldn’t be able to bail out Jefferson should it default, Rogers said.
“We’ve got enough problems at the state,” he said. “We can barely do a budget. We can’t even fund the prisons right now.”
Rogers said Bentley called this month asking whether the county’s 12 Republican and 12 Democrat legislators -- two House seats are vacant -- could come together.
He said he told the governor that wasn’t likely, particularly on the question of shoring up the general fund, which lost about $70 million when the state Supreme Court threw out the so-called occupational tax in March.
County officials have said a general-fund solution is critical to avoiding bankruptcy.
Diverting Health Funds
Rogers and Senator Linda Coleman, a Birmingham Democrat, said they would support a new tax. Beason said he would not.
He wants to remove earmarks on a local penny sales tax that raised about $56 million last year, instead. State law now sends 65 percent of that money to pay for health care for the poor. Rogers and Coleman oppose taking that money away.
David Perry, chief of staff for the governor, said legislation might be drafted to prevent any single county lawmaker from stopping it. A law creating a sewer district might apply to counties of a certain size, and not just Jefferson, for instance, Perry said.
“In a special-session context, it would be very much a statewide issue,” he said.
The governor does have some powerful allies in his effort to avoid a Jefferson County bankruptcy.
Business Weighs In
The Birmingham Business Alliance, chaired by James McManus, the chief executive officer of Energen Corp., has pushed for a settlement. In a memo to its membership last week, MacManus and Chairman-elect John Johns, chief executive of insurer Protective Life Corp., said a filing would be “devastating” to efforts to attract and retain companies.
“The business Republicans are behind” a settlement even though it may require a tax increase, said Larry Powell, a University of Alabama at Birmingham professor of communications and former political consultant. “It’s the Tea Party Republicans who are opposing it. They’re not a majority, but they’re enough to create a problem.”
To contact the editor responsible for this story: Mark Tannenbaum at email@example.com