Alabama county lays off 1 in 4 workers after bond fiasco

Jefferson County risks becoming the largest local-government bankruptcy in recent US history.

Forced to lay off nearly one-fourth of its workforce on Monday, Alabama's Jefferson County – home to a quarter of all Alabamians – has become a warning klaxon for thousands of US municipalities that dabbled in risky municipal bond investments.

The county is, in effect, out of money. After a judge declared months ago that an occupational tax imposed to pay off a massive sewer bond was unconstitutional, officials were unable to take steps to avert the layoff of more than 1,000 county workers on Monday.

Residents looking to pay their taxes or renew their car registrations are now seeing Soviet-style queues in the few courthouses that remain open. The county has also said it has no money to bury indigent residents who have died.

“The cutbacks are draconian; it’s quite a mess,” says Paul Pecorino, an economist at the University of Alabama at Tuscaloosa.

Not out of the woods yet

The county (pop. 640,000), which contributes a third of the state’s gross domestic product, also faces the possibility of becoming the largest municipal bankruptcy in recent US history.

Its predicament epitomizes the kind of bravado financing, reckless spending, and lack of government oversight that fueled the national recession, economists in Alabama say.

The core issue, they say, is that county politicians looking to minimize costs for big projects didn’t properly vet the complicated derivatives and other financing instruments they were being pitched by out-of-state bond bankers. In that, Jefferson County is in good company.

“This is happening in a lot of different places,” says economist Robert Brooks, president of Financial Risk Management LLC in Northport, Ala.

So far, the financial quagmire hasn’t hurt the political career of its main player: Larry Langford, who put the bond package together, is now the mayor of Birmingham.

“The blame can be spread all around, but the bottom line is it makes you wonder if people [in county government] took even a basic home economics lesson,” says Sam Addy, director of the Center for Business and Economic Research in Tuscaloosa, Ala. “Can you balance your checkbook? If you can’t, then you can’t balance your credit-card account or anything else.”

Interest-rate swaps engineered by Mr. Langford, then the county commission chairman, in 2002 and 2003 were intended to reduce the county’s debt obligations for a $3.9 billion sewer system upgrade and expansion begun in the mid-1990s. But the moves had the opposite effect when credit markets froze up in 2008 and when the recession slowed anticipated growth and revenues. He is slated to stand trial later this month on money-laundering charges in connection with the interest-rate-swap deal; he has pleaded not guilty.

$7,000 of debt for every resident

The county has been in default for more than a year and is now the most indebted local jurisdiction in the US, with an estimated $7,000 of public debt for every resident.

County leaders and a special legislative committee in Montgomery are meeting Tuesday to hammer out a new taxing mechanism to help get Jefferson County back on its feet. In a home-rule state where taxing power resides primarily in a legislature dominated by rural interests, that may not be easy.

A state bailout may be necessary, says Mr. Brooks, but is not ultimately in the best interest of Jefferson County.

“If you give money to somebody who is poor because they have an addiction, that is unkind,” says Brooks. “All you’re doing is further propagating a very bad thing.”

He adds: “The shocking thing to me is they’re dialing the phone numbers of the very financial advisers that got them into this mess to help them get out of it.”

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