Porter, White & Company Chairman Jim White spoke at a symposium sponsored by Samford University’s Cumberland Law Review on Friday, January 29, 2010 entitled The Jefferson County Sewer Debacle. A portion of White’s speech, “Financing Plans for the Jefferson County Sewer System: Issues and Mistakes,” was covered by The Birmingham News in its Sunday, January 31 edition.
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White called the presentation “a personal recollection of events, bound together with analysis and opinion,” and described his sporadic contacts with Jefferson County sewer operations and finance over the decades. Substantive topics included in the presentation are summarized in the following paragraphs:
- Because it was based on inadequate analysis of problems and solutions relating to the County’s sewer system, deficiencies in the consent decree contributed to the fiasco in its implementation.
- The failure to properly address the County’s sewer problem raises questions about the commission form of government.
- Competition among bond insurers motivated a financial structure with inadequate security for debt holders. The County’s bond indenture lacked, or included watered down versions of, security provisions customary in major revenue debt financings. A debt service pattern of delayed and then rapidly increasing annual debt service payments, together with an “automatic rate ordinance” that avoided commission votes on rate increases, removed the discipline of commissioners periodically facing the public when it came time to increase rates.
- When both bond insurers and rating agencies failed to perform their jobs adequately, when “the blind led the blind,” disaster ensued.
- Opaque interest rate swaps were invitations to fraud in which Wall Street firms became “bag men” facilitating corruption. Through both Democratic and Republican administrations, the SEC ignored calls to investigate.
- Swaps were an important part of J. P. Morgan’s strategic plan for the public finance business. As documented by Bloomberg, in Jefferson County and elsewhere J. P. Morgan did a number of swap transactions with pricing that was not equitable for the customer.
- Jefferson County’s accounting systems and financial reporting capabilities have been woefully inadequate for many years. The lack of good financial and management information contributed substantially to the disaster and makes it difficult to implement a solution.
- Conversion to synthetic fixed rate debt in 2002 and 2003 lowered interest rates and deferred debt service (thereby reducing required near term rate increases) but introduced greater risk in the financing structure, which came back to haunt the County when bond insurance companies were downgraded.
- The County is obligated to increase sewer service charges to cover debt service to the extent “reasonable.” Is it “reasonable” for rate payers to be forced to pay for fraud? This is a question for the courts to decide.
- Responsibility for the Jefferson County sewer crisis is widespread, and there are no quick fixes. A condition precedent to any stable financial resolution is functional financial systems and reporting capability, adequate provision for capital expenditures long term, and a determination of the level of sewer service fees that it is reasonable to charge users of the sewer system.