Alabama County Faces Bankruptcy

A financial crisis has Alabama's Jefferson County on the verge of a $4.2 billion bankruptcy action. The county is home to Birmingham, the state's largest city.

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There's been a lot of news recently about bankruptcy from individuals to big investment firms. Well, how about a county? Jefferson County, Alabama, is in serious financial trouble. It's the county that includes Birmingham. County leaders are hoping for help from Washington. Today, they went to a meeting at the Treasury Department looking for ways to avoid bankruptcy.

Tanya Ott reports from member station WBHM in Birmingham.

TANYA OTT: Go to any government meeting, whether on Capitol Hill, the State House or City Hall, and you'll hear people disagree about policy and fight over funding. But Jefferson County, Alabama, takes it to a new level. The county has $5 billion in debt and faces what would be the largest municipal bankruptcy in U.S. history. County Commissioners Sheila Smoot and Bettye Fine Collins are feeling the pressure.

Ms. SHEILA SMOOT (Commissioner, Jefferson County, Alabama): This is so critical, historical. You have a lot of nerve, commissioner, a lot of nerve when people's lives are at stake. Where is your compassion?

Ms. BETTYE FINE COLLINS (Commissioner, Jefferson County, Alabama): Commissioner…

Ms. SHOOT: Where is your leadership?

(Soundbite of gavel)

Ms. FINE COLLINS: We're not going to have a committee meeting. We're going to adjourn.

OTT: Jefferson County's financial mess dates back to the '90s, when it issued bonds to upgrade a leaky sewer system. Bonds are a common financing tool and usually have a fixed interest rate. But six years ago, county commissioners decided to swap the fixed rates for variable and auction rate bonds. The recent subprime mortgage meltdown pushed those variable rates up and decimated the auction bond market. And people like Birmingham resident Trisha Working(ph) are paying the price.

Ms. TRISHA WORKING (Resident, Jefferson County, Alabama): Citizens are having their sewer bills doubled and tripled. Some are paying are $300, $600 for sewer. People cannot afford that.

OTT: Newly appointed County Commissioner George Bowman says the crisis started in Jefferson County, but it won't end here.

Mr. GEORGE BOWMAN (County Commissioner, Health and Human Services, Jefferson County, Alabama): Other places have borrowed money from Wall Street. They have also put their faith in auction rate bonds, variable rate bonds. There are lots of municipalities who have billions of dollars of debt, multimillion dollars of debt that are tied up in this very same thing.

OTT: He's right. The Port Authority of New York and New Jersey faces a fourfold jump in interest rates on one of its loans. Other cities and counties from Michigan to Mississippi to California face interest rate payments hovering near 20 percent on their municipal debt.

Analyst T.J. Marta of investment bank RBC Capital Markets describes the implosion of the municipal financing system in the industry podcast Derivactive.

Mr. T.J. MARTA (Senior Currency Strategist, RBC Capital Markets): Ironically, you get this perverse feedback loop where because the investors don't trust the banks, the borrowing rate goes up for the municipality. The ratings agency comes in and says, municipality, we're going to downgrade your credit rating because now we think there's a greater likelihood that you're going to default.

OTT: Standard & Poor's has already downgraded Jefferson County sewer bond rating to the lowest junk level after the county missed a multimillion dollar bond payment. The commission is under a cloud of suspicion. Twenty-one people have been convicted of fraud related to sewer contracts, and former county commissioner and current Birmingham Mayor Larry Langford is under investigation. Birmingham News columnist John Archibald says residents should be up in arms, but they've been curiously quiet.

Mr. JOHN ARCHIBALD (Columnist, The Birmingham News): I've written about this issue over 100 times in the last four years. And I can't tell you how many times people came up to me and said, you know, please write about something else. This is just so boring. It is a very difficult topic to understand, but I also think there's a good deal of apathy out there.

OTT: When Orange County, California, declared bankruptcy in 1994, it rebounded rather quickly, but the economy was better then. Analysts say the legacy of this current bond crisis could haunt Jefferson County, Alabama, for a very long time.

For NPR News, I'm Tanya Ott in Birmingham.

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