Fighting City Hall

By Robert Carpenter, Editor | August 2011, Vol. 66 No. 8

Extreme economic hardships for many municipalities are pushing some cities to consider extreme actions – such as the rarely occurring municipal bankruptcy. Consider the case of Birmingham/Jefferson County, AL.

At press time, what was expected to be the largest municipal bankruptcy in U.S. history was delayed for a week and expected to be narrowly averted after Wall Street blinked and offered a deal to reduce the debt-load of Birmingham/Jefferson County, AL. Local officials had until Aug. 4 to negotiate a new settlement with investors.

The county, with a population of roughly 660,000, owes more than $4.1 billion – about $3 billion just for the sewer system. The county's settlement offer would erase more than $1 billion of its debt with the promise of repaying the remaining amount through a combination of modest sewer rate increases and loans. Creditors came back with a compromise on July 28 which Jefferson County officials are considering as negotiations continue.

Hopefully, a settlement can be reach that the country/city residents can afford. Either way, the county citizenry will be saddled with a huge debt for many years. Sadly, much of it could have been avoided.

Birmingham was nailed with major sewer violations and failure to comply with Federal clean water standards by the EPA dating back to the 1990s. The subsequent EPA Consent Decree forced Jefferson County to replace and upgrade its dilapidated and failing sewer system that for decades had been ignored or merely patched, further weakening the system and delaying the inevitable failure and regulatory prosecution.

Working with outside advisors, the county officials used bonds to finance the sewer improvements in a series of complex and risky transactions that were later proven to be tainted with bribes and influence-peddling. Payback costs dramatically began to climb in 2008 because of increasing interest rates as global credit markets struggled. The county found itself no longer able to afford the loans.

At the same time, several elected officials, public employees and business personnel were convicted of rigging the tainted deals that helped push the county into financial disaster. Those convicted included then-Birmingham Mayor and former Jefferson County Commission President Larry Langford and ex-Commissioner Chris McNair (who, incidentally, has petitioned President Obama for a pardon).