BIRMINGHAM, Alabama (Reuters) - When the commissioners of Alabama’s Jefferson County emerged from a closed session last Wednesday to take their seats at the dais in the wood-paneled hall of the county’s 80-year-old courthouse, few expected drama.
Most likely, the five elected officials would vote to extend talks with creditors over the county’s $3.14 billion sewerage project debt. After all, they had been talking with Wall Street banks and other creditors for more than three years and had agreed to a framework for an agreement in September.
Instead they dropped a bombshell: they had voted by 4-1 to file for the biggest municipal bankruptcy in United States history, a bankruptcy that includes Alabama’s largest city Birmingham, once famous for its steelmaking and nicknamed “The Magic City”.
It was a vote that went across Republican-Democratic party lines, and was supported by commissioners representing both the county’s rich suburban areas and some of Birmingham’s poorer urban communities.
An impasse over talks led to bankruptcy but the roots of the crisis go much deeper. A 58-page court filing last Wednesday by the county lays out what it says are the “myriad financial catastrophes” behind the bankruptcy.
It cites fraud, corruption and toxic Wall Street refinancing deals to explain how a sewer system upgrade originally projected to cost as little as $250 million wound up saddling the county with such a huge debt.
Twenty-two people have been convicted for corruption over those deals including the former mayor of Birmingham, Larry Langford, who was commission president at the time of the refinancing. JPMorgan Chase & Co paid Jefferson County $75 million in 2009 and forfeited $647 million in fees to settle securities charges related to the refinancing.
There is little agreement between politicians and creditors over why the September deal unraveled with both sides expressing, in public at least, incredulity over the events of last week. Sources close to the creditors say that they were shocked by the bankruptcy move as they thought a final deal was about to be struck.
If anything, the blame game has worsened in recent days.
Here is a summary of the two sides’ views, together with the implications and likely next steps:
Three of the commissioners interviewed by Reuters said the turning point came last Monday when creditors who include JPMorgan sent a document to commissioners outlining new settlement terms.
They said the new terms weren’t what they thought they had negotiated and they spent two days combing through the document with lawyers before deciding that bankruptcy was a better alternative to accepting a revised deal.
Among the concerns, the creditors were insisting on being paid back $2.19 billion of the $3.14 billion debt, rather than the $2.05 billion the commissioners had expected. And the commissioners claim that the revisions meant an assistance program to help those on a low income pay higher sewerage rates would have to be shouldered by the county for 10 years.
“When I read the document that came back Monday my blood pressure shot up. I felt like everything was in favor of the creditors and nothing was in favor of the county,” said Republican Commissioner Joe Knight.
The Commission President David Carrington, also a Republican, said he had been optimistic up until last Monday night. “When I left here (the commission offices) Monday night I thought we had an agreement. I felt good. But I got a call from one of our attorneys. It was about nine o’clock, saying there was these new revisions,” he said.
“They had these conditions and those conditions are unacceptable. I knew it wasn’t going to happen,” he said.
Commissioner Sandra Little Brown said that what happened this week felt like a betrayal of trust.
Brown was elected in 2010 to represent an urban district and quickly formed an alliance with Carrington that crossed party lines and helped establish the commission unity.
She voted yes in September for a deal that included provisions for a sewer rate rise of 8.2 percent for the first three years followed by increases of 3.25 percent.
Many of her constituents worried they would bear the brunt of rate hikes and cuts to county services and Brown worked to convince them a deal was for the best, pointing out that it included an assistance program for people on low incomes funded by the creditors.
All that changed when she saw the terms last week.
“We felt like the creditors were playing games with us. The creditors were supposed to fund the low-income assistance program but all of a sudden the county is funding it for the first 10 years,” she told Reuters.
“The concessions that they promised would make that $2.19 billion go back to $2.05 billion never happened. We asked them to change it and the receiver said: ‘This is all you get,'” she said.