Politician-Assisted Suicide
By Kyle Whitmire
Site: http://www.bhamweekly.com
About: Is a staff writer and columnist for Birmingham Weekly. His political column, War on Dumb won the 2008 Association of Alternative Newsweeklies Award for Best Political Column. Follow on Twitter. See Authors Posts (322)
A week ago, Commissioner Jim Carns sat behind the wide desk in his office at the Jefferson County courthouse. He had the beaten look you’d expect from a man who’d spent several hours on a witness stand getting mugged by a hostile attorney. One floor upstairs, in Circuit Judge Joseph Boohaker’s courtroom, Sheriff Mike Hale was suing the county to keep the commission from cutting $5 million from his department’s budget. Commission President Bettye Fine Collins was supposed to testify that morning, but she called in sick. Carns, who had wrangled with Collins on the commission for more than a year, testified in her place.
Carns and his ally on the commission, Bobby Humphryes, were elected to their offices at the county in 2006, both of them having served first in the Alabama House of Representatives. With incumbent Bettye Fine Collins they campaigned for their offices as a Republican slate with a pithy campaign pitch: “No debt, no dome, no Democrats.”
Once they arrived downtown, however, they found the political realities askew from their sloganeering. The debt was already there – $3.8 billion of it, in addition to derivatives, called interest rate swaps, that were backfiring on the county. Because of the burgeoning financial crisis, a domed stadium was no longer a realistic agenda item. Political alliances blurred ideological lines as Collins split with the Republicans to ally with two Democrats to form a new majority.
To make matters worse, a decade-old fight over the county’s occupational tax threatened to send Jefferson County off a financial cliff. In 1999, the Alabama Legislature had voted to repeal the tax, and after 10 years, the courts had affirmed that decision. That reduced the county’s revenue by about $70 million per year. Without that money, Carns now says, county government probably won’t be able to survive, certainly not in its current form. That’s not an easy admission for Carns to make. You see, while they were in the legislature, he and Humphryes both voted to kill that very tax.
If Carns wasn’t an ideologue when he arrived at the Jefferson County courthouse, he certainly benefited from the support of reactionaries in his district. Now, however, he sits in his office, watching the unfolding disaster from an informed and lonesome perspective. Many of his constituents have had enough of what’s happened at the county and long ago tuned out the minutia of the crisis, even though those details are important.
“I think there is an information overload with the county,” he said last week. “When most citizens hear news about the county now – they were overwhelmed with it a year ago.”
It’s a fair point. For the last several years, news about Jefferson County government has been a torrent of bad headlines. If you listen to talk radio or read the posts in online chat rooms, you’ll see reactions that don’t draw distinctions between the sewer debt crisis and the occupational tax crisis. Sometimes the lines seemed blurred between the Jefferson County Commission and the City of Birmingham.
What is clear to all is that Jefferson County is nearly out of money. When its bank account is empty, the county will not be able to make payroll without drastic cuts. That could leave county residents without essential services on which they’ve come to rely, things such as police protection in unincorporated Jefferson County and even some incorporated areas such as Center Point. Citizens are left to do two things: be angry and demand answers.
To the casual observer, watching what’s been happening at Jefferson County has been a bit like staring into the sun. The magnitude of what’s happening can overwhelm the senses and scar the eyes. For as long as anyone can remember, the county has hovered there as a constant thing. Just as Alabamians hate the August heat, some have loathed the county government. Others have worshiped at its altar and assumed that it was, as they say, too big to fail. But look at it through a welder’s mask or an appropriate telescope, and you will see there discrete acts of violence – flares, sun spots and eruptions of dangerous radiation. Extrapolate its future, and you’ll see that it’s exploding in slow motion before collapsing into a cold dark nothing.
Sewer debt crisis
The first thing to understand is that, on paper at least, the sewer debt crisis and the occupational tax crisis are two different things. And for the moment, at least, the sewer debt crisis is the more stable of the two challenges facing the county.
Jefferson County residents are probably more familiar and impatient with the sewer debt crisis. For at least half of the households in the county, a reminder of it lands in their mail boxes once a month.
In the early 1990s, a lawsuit brought by residents and later taken up by the Environmental Protection Agency forced the county to repair its sewer system. That lawsuit left some politicos grousing about environmental activists, but the reason for the lawsuit was as clear as it was gross. Sewer systems throughout Jefferson County were consistently conducting “sewer treatment plant by-passes,” engineer-speak for dumping raw sewage directly into rivers and streams. The practice was a public health hazard, and in 1996, Jefferson County agreed to fix the problem without having a clear idea how much a solution would cost. Estimates at the time ran as high as $1.2 billion, but over the next 10 years the county incurred more than $3.2 billion in debt trying to fix the system. That debt was simply too much for the county to pay, but it tried, and the mechanisms it used in the attempt have only made matters worse.
There is no longer any question that cost was inflated by corruption and waste. More than 20 public officials and contractors have been convicted of public corruption charges related to the sewer crisis. Corruption caused the debt to grow, and prosecutors argue that corruption caused the county then to enter into complex and poorly understood derivative agreements called interest rate swaps.
All three members of the county’s finance committee from 2002-2006 – Larry Langford, Gary White and Mary Buckelew – have federal charges pending against them. Gary White was convicted last year of taking kickbacks from a sewer contractor but he was granted a motion for a new trial. Buckelew has pleaded guilty to obstruction of justice and admitted that she took gifts from Montgomery investment banker Bill Blount while on trips to meet with Wall Street bankers in New York. Langford is under indictment for accepting gifts from Blount, too. Prosecutors say he took more than $230,000 worth of cash, clothes and jewelry from Blount in exchange for county bond business.
Those deals were supposed to save the county money in interest rates, but the consequences of Jefferson County trying to outsmart the market have been disastrous. Beginning in 2002, Jefferson County converted nearly all of its bond debt from fixed-rate bonds to variable rate demand warrants and auction rate securities. Those securities gave the county low interest rates, at least in the beginning, but they came with greater risks. On top of the $3.2 billion of mostly variable-rate debt, the county conducted the interest rate swaps with a notional of more than $5 billion. That’s not how much the county owes on the swaps, but it is a significant fact for this reason: That the county had a notional value of its swaps greater than its debt should have been a red flag that the county was using swaps to speculate on interest rates rather than to hedge. Under Alabama law, using swaps to hedge against interest fluctuations is legal, but speculation is not. The county was literally gambling with public money.
Early swaps did well for the county, but by 2007, the county’s transactions had drawn the attention of national media and the SEC. That attention was too late. The county was unable to unwind and restructure its overly complicated debt. The only way to do so would have involved significant increases in sewer rates – political suicide for county commissioners.
In the early spring of 2008, it all fell apart, but the timing was not the county’s fault. The county had supported its bond deals with bond insurance. Those insurers had invested heavily in mortgage-backed securities. When the ratings agencies downgraded those insurers, it triggered a chain reaction in the county’s debt structure. The county itself was downgraded. The variable rate demand warrants and auction rate securities reverted back to the banks that sold them, as the bond-holders were allowed to do under the agreements. By those same agreements, the banks were allowed to hike interest rates on the debt, often higher than 10 percent. At the same time, this triggered accelerated payment schedules on sewer debt as well as general obligation debt. Instead of paying the debt off over perhaps 20 years, the county would have to pay off the debt over three or four years.
It was simply too much for the county to pay. The county entered into a long series of forbearance agreements with the banks. Negotiations stalled as commissioners fought among themselves for a solution. Carns and Humphryes supported bankruptcy, choosing to fight the banks in court and perhaps expose wrong doing on Wall Street’s side of these deals. Collins, Shelia Smoot and William Bell supported continued negotiations, and Gov. Bob Riley stepped in to broker a deal for the county with Wall Street.
The deal they reached was to redirect a one-cent sales tax to help pay down some of the debt, while Wall Street banks agreed to forgive more than $1 billion in swap termination fees and interest payments. That agreement, however, needed the backing of the Alabama Legislature. The Legislature said no.
On the hook for Jefferson County’s debts, the bond insurers sued the county. They asked a federal judge to appoint a receiver, essentially a court-appointed dictator, to take charge of the sewer system. U.S. District Judge David Proctor ruled that a receiver wouldn’t do much good since federal law prohibited him from appointing a receiver with the power to raise sewer rates.
Contractually, the county is obligated to pay only net sewer revenues to its bond holders. Creditors can’t force the county to raise taxes or sell property. They might be able to force the county to raise rates in state court, but with elected judges in Alabama, that’s far from certain.
For the time being, the sewer debt crisis is in stasis, and that’s exactly where the county wants to keep it. Because, while the county was struggling with its sewer debt, a far greater threat crept up on the county, and now that threat just might kill it.
The occupational tax
Ten minutes of C-SPAN will cure any delusion that legislators sit at the in-chambers desks all day dutifully listening to arguments and studying fine print before passing new laws. During much of the legislative session in Montgomery, it’s possible to find more state legislators down the hall getting their shoes shined than making public policy in chambers.
Regardless, the Alabama Constitution of 1901 seems to require a quorum of legislators to take a vote, and a majority of that quorum is needed to approve a bill. With that assumption, any vote with less than half of the legislators wouldn’t be legal.
Or maybe it would.
Yes, it’s silly, but this is the issue that has left the status of the occupational tax in limbo for a decade.
For years, the Legislature has taken votes with what has been called an “implied quorum.” Instead of taking roll, the Legislature would assume a quorum was present. This allowed local delegations, such as ours from Jefferson County, to vote on issues that affected only that delegation’s constituents.
One of those votes by implied quorum happened in 1999. Rep. Arthur Payne introduced a bill to repeal Jefferson County’s occupational tax and business license fees. The legislative delegation had been quarreling with the county commission because some legislators wanted the commission to fund their pet pork projects. The commission refused, and by a vote using the implied quorum, the Legislature voted to repeal the tax, effective April Fool’s Day, 2000.
In March of that year, Jefferson County employees sued the commission. They argued the Legislature had not voted legally to repeal the tax. The commission entered the lawsuit as a friendly party. A Jefferson County Circuit Court judge ruled in their favor that the tax would remain in place and for several years that seemed to be the end of the issue.
The quick legal fix didn’t hold, however. In 2005, Rep. John Rogers introduced a bill to take all city sales taxes collected at the BJCC and give those funds to the civic center. Then-mayor Bernard Kincaid went ballistic and filed a lawsuit to have the bill declared illegal. One of the arguments the city used, and the argument that had the greatest effect, was that the Legislature had passed the bill by an implied quorum. Jefferson County Circuit Court Judge Scott Vowell ruled in the city’s favor, but the BJCC appealed it to the Alabama Supreme Court.
Since the previous implied quorum lawsuit had not gone so high in the appeals process, the affect on case law had been negligible. But since this lawsuit went to the state Supreme Court, its impact would be felt throughout the state, applying to all other laws passed by an implied quorum. Judge Vowell’s decision seemed based firmly on the law, but had the Supreme Court upheld that decision, it could have potentially negated thousands of laws in Alabama, including almost all local bills passed for as long as anyone could remember.
Instead of scrapping the Alabama Code, the state Supreme Court stretched as far as it could to rule the implied quorum legal. The court found that state law allows the Legislature to set its own rules, including an implied quorum, even if those rules apparently violate the state constitution.
Suddenly, the basis for preserving Jefferson County’s occupational tax was gone.
In 2007, a lawsuit filed in state court asked the courts to revisit the occupational tax issue. The county fought the suit while simultaneously asking the Alabama Legislature to reinstate the tax. During the last two years, every commissioner has asked either through the media, through correspondence, over the phones or in person for the Legislature to reenact the tax. Even Humphryes and Carns, who while members of the Legislature voted to kill it, asked their old colleagues to support it.
During the last two sessions, several legislators introduced bills to reinstate the tax, but none of the bills made it to the governor’s desk. One major sticking point was an existing exemption for licensed professionals. As the argument goes, lawyers and doctors were exempt from the tax, but not their secretaries. Democrats wanted the exemption removed. Republicans loaded the tax with poison-pill earmarks.
At the end of the 2009 Legislative session, Rep. Rogers refused to let a compromise bill go to a conference committee, effectively killing it.
He might have killed the county, too.
Earlier this year, Circuit Judge David Rains ruled the tax illegal. After some more legal wrangling between the plaintiffs and the county, Rains ruled the county could keep tax collections in escrow but not touch them until an appeal to the Supreme Court had run its course.
The End?
Losing the occupational tax has left the county with a devastating cash flow problem, and there are no more reserves to buy the county time. Years of wasteful spending, outrageous debt service, fiscal mismanagement and legal entanglements have left Jefferson County’s coffers depleted. Repeated scandals have left the county’s political capital spent as well. There’s no sense of urgency among the public to save the county from its possible collapse.
During the sheriff’s lawsuit last week, finance director Travis Hulsey told the court that the county was operating with less than $5 million in the bank. What was more startling were the figures he gave for cash flow. The county had $18 million per month in expenses, he said, and only $8 million in revenue.
In a memo this week, to county department heads, Hulsey and county attorney Jeff Sewell updated those figures. The county has cut costs by about $2 million per month, not nearly enough to balance the budget. Of the remaining $16 million in monthly expenses, about $12 million goes to payroll. Without drastic cuts, the county will not have money to make payroll on Aug. 21.
“It is not appropriate or lawful for the County to permit employees to work if their wages cannot be paid,” the memo said. “To prevent that from happening and to comply with the balanced budget requirement of Alabama law, the Commission must cut County payroll costs by $8 million per month by Aug. 1, 2009.”
The county has more than 3,000 employees, but employees at Cooper Green, the sewer department, economic development and the sheriff’s department will be exempt. Cooper Green is supported by an earmarked tax. The sewer department subsists on sewer fees and economic development relies mostly on grants for its funding, Human Resource Director Demitrius Taylor said Tuesday. Judge Boohaker ruled the county is required by law to fund the sheriff’s department.
That means, nearly two thirds of the remaining employees will be put on administrative leave as of Aug. 1. The administrative leave will likely last for six weeks, and can last for as long as a year. More than 1,000 county employees will be asked to stay home.
“Jefferson County is going to be skeletal,” Commission President Bettye Fine Collins said Tuesday.
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