I have more coming on this story later this afternoon – I’m still talking to some folks down in Birmingham who are helping me sort out the news – but I wanted to relay an unnerving development in the Jefferson County, Alabama sewer story.
Earlier this year I wrote about the Jefferson County story in a piece called “Looting Main Street
” in Rolling Stone
. In this tale employees of a group of high-powered Wall Street banks, led in particular by JP Morgan Chase, funneled money to local politicians in Alabama, who in turn signed off on toxic interest-rate swap deals that left the county saddled with monstrous debt for a generation.
Jefferson County is essentially the world’s worst credit card story. The local pols ran up massive bills to build a “Taj Mahal of sewer-treatment plants,” then saddled future voters with a blizzard-worth of rate hikes, punitive fees and late charges. Alabamans who should have paid $250 million for their new sewer system now owe over $3 billion, thanks to their corrupt politicians and the greedy carpetbagger banks who dragged these local hicks into deadly derivative deals.
These types of finance scams are the template for a whole new type of symbiotic relationship between politicians and the financial services industry: deals like the JeffCo interest-rate swaps allow politicians to borrow vast sums essentially without immediate consequence, making it possible to green-light politically-popular programs during their terms but leaving future leaders holding the bag when the bills come due. We saw similar stories in Greece and in the Denver school system; hundreds of communities in Italy and other European countries are also experiencing similar debt-blowups thanks to rate swaps and other deadly deals.
Anyway, back in the mid-nineties, the average sewer bill for a Jefferson County family of four was only $14.71. By the time I wrote my story earlier this year, most citizens were paying about four times that amount – and as of this summer, the average JeffCo sewer bill was $63. Well, the news now comes out that rates will go up again, and in the best case scenario they will jump 25% a year. The worst case? Jefferson County sewer rates could jump as much as 527%, with some estimates placing the average monthly bill as high as $395 a month.
This is what happens when corrupt politicians turn over their financial sovereignty to private businesses. This question is going to be resolved in the courts, where the lawyers for the trustee of the county’s sewer debt – Bank of New York-Mellon – requested that a Circuit Court judge appoint a receiver to decide sewer rates.
Depending on whom the judge appoints to the seat, the decision could go down one of two ways. If the judge orders the receiver to set sewer rates that are “reasonable,” then the citizens of Birmingham, who incidentally never voted to borrow this money, will merely be faced with astronomically high (and perhaps the highest in America) sewer rates.
But if the judge rules in favor of the creditors, then JeffCo is screwed. One lawyer quoted in the Birmingham News put it this way: “But if [the judge’s order] says the receiver shall act in accordance with the indenture … you’ll have a lot of people who won’t be flushing their toilets.”
Again, Birmingham voters really have never had much of say in any of this. Moreover, unbelievably, there might even be fees envisioned for citizens of the area who don’t even use the sewers. There is talk of “a fee of $30 a month for homes and businesses near, but not connected to, county sewer lines and $20 a month for others not on the system.”
Will update this later.
So I talked to a couple of the lawyers involved in this case. What basically happened here is that when some of the monoline insurance companies who were insuring Jefferson County’s bonds saw their credit ratings downgraded in 2008, that triggered language in the count’s bond deals that accelerated their debt payments. Specifically, thanks to those downgrades, Jefferson County was suddenly legally obligated to retire $800 million in bonds in four years.
Imagine if you had a downgrade in your credit rating and that suddenly forced you to pay off your whole mortgage in four years, that’s roughly the deal here. Since the county can’t make those payments, they’re in default – and when they went into default, that opened the door legally for a receiver to be appointed. That receiver legally has the power to fix and raise rates. There’s really no issue of fact here; the bondholders are legally entitled to get that 500% increase.
Fortunately for Jefferson County, the Alabama constitution has a section that mandates that rates must be “reasonable.” But there’s going to be an argument in state court about what “reasonable” means, and the creditors are going to argue that the massive rate hikes that are being talked about are “reasonable.” Most people I talked to didn’t think there was any way Jefferson County will ever see a 500% rate increase, but everyone agrees it’s still going to be a crooked number, no matter what it ends up being.
This is all just a footnote to a crime that was really committed a long time ago, but it’s worth pointing out that even though the predatory debt scheme has been exposed, and everyone in America knows the citizens of the county were gruesomely ripped off, the debts haven’t gone away or anything for the people who actually live there. One Birmingham woman who wrote to me this morning says she’s considering moving. “My husband and I are talking about moving out of Jefferson County,” she says.
p.s. Incidentally, for those of you who are writing in to laugh at me about my NFL predictions – I lauded Kevin Kolb, picked the Eagles for the Super Bowl and said Tim Tebow was going to be really good – yeah, I know how much I suck. I really do. I’m the worst sports prognosticator in history. I routinely lose to my dog in my NFL picks (I have her choose by picking one of two Milk-Bones laid out over team names). So, you don’t need to write in, I’ll stipulate.