The story of Jefferson County, Alabama filing the largest municipal bankruptcy ever last week is well-known. The county went into hock for about $3 billion to build an EPA-mandated sewer system. On the way to completing the system, every local crook and corrupt politician piled onto the project to skim off some pork. Many of these players ended up in prison and left the taxpayers saddled with a sewer system they really can’t afford.
Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court. My advice to Jefferson County Commissioners is to stop fighting John Young and change his role into a salesman for the system. The sewer system is an albatross, and it should be sold and creditors repaid with the sale proceeds.
The Russell County Circuit Court’s mandate covered raising sewer rates and lowering costs but did not grant Mr. Young a role in facilitating a settlement with sewer debt creditors. According to Young, he took on that responsibility “unofficially.” He claimed to have traveled many times to New York City to negotiate potential haircuts on the outstanding debt, meeting repeatedly with JP Morgan, the biggest creditor, and other Wall Street banks. Young had a lot of experience dealing with Wall Street as the former president of the publicly-held American Water Works Company.
There is a lot of animus towards John Young in Jefferson County because he has been paid over $1 million in the last year and is perceived to be representing Wall Street instead of taxpayers. The Jefferson County political elite, from U.S. Representative Spencer Bachus to the Jefferson County delegation to the state legislature (shown in the video above), want John Young out of the county’s affairs. The Commissioners of Jefferson County filed a motion in federal bankruptcy to remove Young as the sewer system receiver. That motion will be argued on Monday.
I attended a luncheon yesterday of the Municipal Analysts Group of New York where John Young talked about his role running the sewer system, his trips to New York to meet with creditors and his current fight to retain control of the system in bankruptcy. What was clear from his presentation was that the sewer utility that he found when he stepped into the receiver role was run as a comfortable, good-ol’-boy operation with few management controls. He said that no income statement, balance sheet or long-term business plan had been developed for the system. As someone coming from a shareholder-owned company he first set to work getting operational metrics and cost accounting in place. Imagine transforming an utility that had just spent billions on infrastructure with few controls into a cost-driven operation. It’s a mighty feat.