Budget politics stirs bankruptcy rhetoric in Jefferson County, Alabama

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Critics of the new Jefferson County, Alabama, budget say the spending plan could damage the county’s creditworthiness only six months after the last court closed the final door on the county’s bankruptcy case.

Commission President Jimmie Stephens and former commissioner David Carrington contend that some measures in the 2020 budget could set the county on an unstable course.

The County Commission on a 3-2 vote adopted a $700 million budget on Aug. 8. The county's fiscal year starts on Oct. 1.

Commissioners Joe Knight, Lashunda Scales and Sheila Tyson voted to approve the budget. Knight is a Republican and an attorney who was elected to his third term in November. Scales and Tyson are Democrats; the former members of the Birmingham City Council won seats on the commission in November.

Stephens and Commissioner Steve Ammons, both Republicans, voted against the budget. Stephens sought unsuccessfully to send the spending plan back to committee for further review.

Although the budget is balanced, Stephens and Carrington said there are measures that violate budget policies adopted by the prior commission after the county exited bankruptcy in 2013. Carrington also attended the Aug. 8 budget meeting; he didn't run for re-election in 2018 and Ammons won his seat.

Stephens and Carrington were among the commissioners who voted to place Jefferson County into Chapter 9 bankruptcy in November 2011 after a lawsuit struck down an occupational tax that was a major source of county funding, and the county’s debt-ridden sewer system collapsed amid the financial crisis.

“We’ve been through bankruptcy and understand the pain,” Stephens said. “We were attempting up until this year to establish budget stabilization funds and a catastrophic fund to keep from having to experience a shortage in case of an economic downturn, so this a little unusual to go through this.”

Stephens and Carrington said they’re concerned that no additional money was put into reserves in the new budget. Some $15 million from current-year reserves will be rolled over. The unassigned general fund balance won’t be known until the year end closes Sept. 30.

Other problems cited by Stephens and Carrington include the vote to create a $1.25 million fund to assist low-income people on the county’s sewer system, an admirable goal that both believe may be illegal because Alabama’s constitution prohibits municipalities from giving public money to private persons.

They also questioned the creation of a new $1.22 million fund to support community entities and events, most of which Carrington believes commissioners should pay for from their discretionary funds. Each commissioner will have $225,000 to spend on events and other needs in their districts. The $2.47 million they criticize represents about a third of one percent of the budget.

“As a citizen of Jefferson County with a lot of blood on the trail to nurse the county back to financial health, I urged the commission to vote no on the proposed budget and to go back to the drawing board to develop a fiscally disciplined one,” Carrington said in an opinion piece sent to The Bond Buyer. He has also detailed similar concerns in local publications.

“Red flag comments made by Commission President James Stephens and former commissioner David Carrington are reckless and have no merit given the hard work and dedication made by the county to overcome its financial woes while re-establishing credibility with Jefferson County citizens and the financial community,” Scales told The Bond Buyer. Her campaign for county commission included a promise to develop a payment assistance program to help people pay their sewer bills.

Scales said the commission appropriated funds that could be used to support a nonprofit entity that has an existing program that provides public utility assistance, which includes the indigent population of Jefferson County on the sanitary sewer system.

“There is no county-run program. The commission has not yet voted on any appropriate entity to administer the funds,” she said. “Sanitary sewer services are a matter of public health. Assuring that our citizens have access to basic human services is our duty.”

As a matter of public policy, municipal budgets should be balanced and comply with the legal requirements of using funds and tax revenues that are collected, said James Spiotto, a municipal restructuring expert and managing director at Chapman Strategic Advisors.

“Obviously, you’re supposed to be a prudent steward of the tax dollars and part of balancing the budget is making sure reserves are needed for capital and other expenditures,” said Spiotto, who calculated that reserves for Jefferson County’s 2020 budget would be about 2.1% of the spending plan.

Spiotto, who reviewed Carrington’s comments complaining about “an unconscionable lack of fiscal discipline” in the 2020 budget, said commissioners who approved the budget should take stock of Carrington’s views.

“I think certainly these are questions raised by someone who was a county commissioner for eight years,” said Spiotto. “You have to take it seriously and there may be good answers to these questions but they are questions that should be answered to make sure certain actions don’t turn out to be missteps which could lead to financial difficulty.”

According to S&P Global Ratings, income levels in Jefferson County sewer system service area are 90% of the national average, while the poverty rate is approaching 20%.

“Since the county emerged from bankruptcy, the county commissioners increased rates about 7.8% per year through fiscal 2018, as planned, and 3.5% per year for fiscal year 2019,” analyst James Breeding said in a December 2018 report. The most recent sewer rate increase was implemented Oct. 1, 2018. For 6,000 gallons of sewer service, the monthly bill is $78.40, he said.

“Although not yet a significant credit negative, rate affordability is increasingly becoming a concern,” Breeding added.

Scales didn’t answer a question about whether she obtained an attorney’s opinion about the legality of using county funds for sewer payment assistance.

Stephens said that after first exiting bankruptcy in 2013, county commissioners built up reserves and targeted spending to benefit local residents the most, such as repairing roads and addressing other backlogged capital needs.

The Government Finance Officers Association, as a general rule, recommends that governments hold in reserves an amount equal to no less than two months of operating expenses, said GFOA Deputy Executive Director Mike Mucha.

“However, GFOA also understands that governments also face different levels of uncertainty and risk related to their revenues and expenses,” said Mucha, who is also director of the Research and Consulting Center. “We would also advise the governments take this into account when determining an appropriate level of reserves.”

Jefferson County filed for reorganization in 2011 and emerged from bankruptcy in December 2013 after closing on the issuance of $1.8 billion of 40-year sewer warrants to write down $3.2 billion of old sewer debt, resulting in an overall 40% haircut to bondholders.

Attorney Calvin Grigsby appealed the plan of adjustment on behalf of a group of ratepayers, launching a years-long and ultimately unsuccessful process that ended when the U.S. Supreme Court denied his request for a writ of certiorari in March.

Grigsby is continuing to pursue a $1.6 billion proof of claim made by ratepayers in the bankruptcy case, based on an argument that the old sewer warrant proceeds refunded in 2013 were used for private purposes and therefore are unconstitutional and uncollectable.

Stephens, who won his third term in November, said he believes certain spending in the upcoming budget should have been used to continue boosting the budget stabilization fund and other reserves “to make sure that during a downturn in the economy that we can still administer government without a disruption of services.”

The budget allocates $1.22 million to support nearly two dozen community entities and events, including $200,000 to the annual Magic City Classic. The city of Birmingham is contributing $793,575 to the Oct. 26 football game between Montgomery-based Alabama State University and Huntsville-based Alabama Agricultural and Mechanical University.

Stephens said the county hasn’t contributed money toward the Magic City Classic during his time in office.

Scales said Jefferson County has contributed to the Magic City Classic in the past and that the largest football classic between two historically black colleges and universities in the nation garners more than $22 million in economic impact to Jefferson County and the region.

“Taxes generated from the 50,000 room nights alone represent a major funding mechanism for the Birmingham-Jefferson Convention Complex,” she added.

Scales also said the recently passed budget reflects the commission’s support for the diverse needs of Jefferson County, and that it includes funding for life-saving storm shelters, programs to remove blight throughout the county, and funds for major capital improvement projects. The budget also assists law enforcement with funding for the Crime Stoppers program as well as the Jefferson County library, “in addition to supporting revenue generators such as the Magic City Classic and others,” she said.

Stephens said the county should maintain a good fiscal policy because there are plans to refund about $2 billion of back-loaded outstanding sewer warrants using a 10-year call provision in 2023.

The 2020 budget “is completely contrary to what we’ve done past six years,” he said. Stephens also said the sewer department’s operations have been steady, with revenues exceeding projections and expenses less than anticipated.

“We are in good shape with our sewer refunding and we want to be in a good environment under better creditworthiness to go back to the market,” he said.

Carrington said he urged the commission Aug. 8 to delay a decision on the budget in order to give more consideration to apportioning revenues from a 1% sales tax authorized by the Alabama Legislature in 2015.

The sales tax enabled the county to refinance $595 million of school warrants. It also established a waterfall for excess sales tax collections after paying debt service on the refunding warrants that includes funding for discretionary use that Carrington said was supposed to help build reserves. He said a minimum of $10 million, or about 5% of the general fund budget, should have been used to fund contingencies and reserves.

“Since my pleas, as well as the formal requests of Commissioners Stephens and Ammons were ignored, I believe this commission is beginning to move the county toward a slippery slope that could very well lead to a future bankruptcy,” said Carrington.

Stephens said he was contacted by two state lawmakers asking him “what’s going on” after the budget controversy was covered by local publications.

“This is something that we really haven’t done before is fund all these organizations and administer the sewer assistance fund,” Stephens said, adding that he plans to request an opinion from the state attorney general about whether the county can legally spent money on it.

Carrington said county commissioners still have time to revise the budget because it doesn’t have to be approved until Sept. 30.

It appears unlikely that will happen. Knight, chairman of the commission's finance committee, held a press conference Aug. 27 and said work on the budget is done.

“There was no rush to pass a budget. But we did pass the budget. The whole process was messy. I take responsibility for that. I’m the finance chair,” Knight said in a video of the press conference posted on YouTube. “Will we bring it back up? The budget’s set. There’s not a whole lot of appetite to bring it back up.”

Knight said he was “not proud of this budget” or the process that was used to pass it. He also complained that “items” were added to the budget late in the process and he couldn’t find out who put them in.

The budget is in place he said, adding, “We’re just going to learn from this.”

Spiotto said the issues raised by Carrington will be of concern to the bond market.

If the county needs to borrow money, people will want answers to the questions Carrington raised, Spiotto said.

“Everybody wants the best for Jefferson County and would really like them to succeed and overcome the past history of the bankruptcy,” Spiotto said. “So they want to get their numbers right and do it in the right way, because nobody wants them to have financial distress and return to bankruptcy.”

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Bankruptcy Budgets Revenue bonds Lawsuits Municipal utility districts Jefferson County Alabama