Jefferson County Bankruptcy Foreshadows Fate of Cities in Crisis

(Bloomberg) -- A massive share of the local government’s tax revenue disappears. Elected officials lay off employees and shutter a health-care facility used by the poorest residents. Road work grinds to a halt. Residents wait in hours-long lines to renew their licenses.

That was 2011 for Jefferson County, Alabama, whose financial crisis may preview what’s ahead for local governments hammered by the worst economic collapse in decades.

Surging unemployment and business closures are causing government revenue to plunge nationwide in a matter of weeks, mirroring the swift hit to Jefferson County when a court struck down a wage tax that covered about 25% of its budget. The 660,000-resident county, which is home to Birmingham, fired 1,300 employees over three years, sold a nursing home and shuttered inpatient services at its hospital that cared for the poor. After closing satellite courthouses, the lines at the main one downtown grew so long that a portable toilet was installed in the park next door. Eventually, the county filed for bankruptcy.

“If you came to the courthouse you had to pack a lunch,” said Tony Petelos, the county manager. “From bankruptcy to today, we’re still rebuilding. It’s taken that long.”

Jefferson County’s painful past may be the future for some local governments facing what could become the biggest fiscal crisis in decades. With an aid package still pending in Congress, local governments are preparing to cut services, idle employees, raise taxes and sell assets. As a last resort, those burdened by excessive long-term debt and pension obligations could file for bankruptcy, although so far investors and analysts haven’t predicted a wave of insolvencies and not every state even allows it.

Jefferson County filed what was then the biggest local government bankruptcy in November 2011 to get out from under the weight of $3 billion of debt issued for its sewer system. What pushed it over the edge was the decision by Alabama’s highest court to strike down a wage tax that generated $75 million annually. The county didn’t have the power to raise other taxes to make up the gap.

“We had no home rule. It wasn’t like, we’ll go and increase the sales tax or we’ll replace the occupational tax,” said David Carrington, former president of the Jefferson County Commission. “We had a set amount of revenue.”

Since payroll is the biggest cost for cities, counties and school districts, furloughs and layoffs are among the first responses to a sharp drop in revenue. And they’ve already started, with almost 1 million employees cut from state and local payrolls last month.

That’s likely to reduce government services. Jefferson County couldn’t open a renovated and expanded jail in Bessemer, Alabama, because the sheriff didn’t have enough deputies to staff it, leading to overcrowding in the county’s Birmingham lockup. Some deputies were moved to 12-hour shifts.

The county also cut spending on infrastructure. Instead of buying new patrol cars, it hired a company to refurbish cruisers to get another 200,000 to 300,000 miles out of them, Petelos said. Road projects were shelved.

“We pretty much quit paving. We just did the basic pothole repairs and that’s it,” Petelos said.

To generate cash, the county sold its nursing home for $11.3 million. In one of its most politically difficult decisions, it closed inpatient and emergency care at Cooper Green Mercy Hospital, which served the county’s lowest-income residents. The money-losing hospital was underutilized, with typically fewer than 40 patients a day, and received more than $10 million a year in county subsidies, Carrington said.

Although an urgent care facility remained open, the closing of the downtown hospital was hard for some residents because suburban hospitals weren’t on bus lines, said Scott Douglas, executive director of Greater Birmingham Ministries, a community organization.

“People lost connection with their doctors,” he said. “One issue was access and the second was speaking with a medical professional that you know.”

Jefferson County exited bankruptcy in December 2013, cutting its sewer debt to $1.8 billion. To pay off creditors, officials agreed to raise sewer rates 8% annually through October 2018, followed by yearly jumps of 3.5% until 2053.

The bond market also helped. Jefferson County, currently rated AA- by S&P Global Ratings, has issued debt twice since the bankruptcy and hasn’t been penalized by investors, said Carrington.

A refinancing of school debt freed up sales-tax revenue, allowing the county to hire back about 350 employees and fund road and bridge repair, economic development and deferred capital projects. The economy, anchored by the University of Alabama’s School of Medicine, banking, and automobile manufacturing, gained steam while residential development in Birmingham boosted property-tax revenue.

In a 2018 bond sale, the county paid a premium of 0.5% on the longest-maturing debt.

Now, it may be better prepared than others to weather the economic slowdown. It has built up more than $170 million in reserves, enough to cover half of its fiscal 2019 general-fund budget.

“One thing we learned in bankruptcy, is you better be prepared,” said Petelos, the county manager.

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