Jefferson County, Alabama: A Perfect Storm of Ethical, Financial, Political, and Market Failures by Louis Ray Morris, Jr. A dissertation submitted to the Graduate Faculty of Auburn University in partial fulfillment of the requirements for the Degree of Doctor of Philosophy Auburn, Alabama August 6, 2011 Copyright 2011 by Louis Ray Morris, Jr. Approved by Linda Dennard, Co-Chair, Professor of Public Policy and International Relations Murray Jardine, Co-Chair, Jane Dickerson Lanier Professor, Department of Political Science Mitchell Brown, Assistant Professor of Political Science William Curtis Ellis, Assistant Professor of Political Science and Public Administration Abstract This study details the ethical, financial, political, and market failures that have nearly caused the Jefferson County, Alabama to file what may become the largest municipal bankruptcy in the history of the nation. ii Acknowledgments Acknowledgements for a work of this nature are fraught with danger because so many people have had to listen to my rants and raves about the body politic in Jefferson County. However, a special thank you must go to Charles Ball, Executive Director of the Regional Planning Commission and the entire Board of Directors of the RPCGB who have supported me in this endeavor wholeheartedly. Also, my gratitude to the staff of the RPCGB, especially Yvonne Murray who has had to hear more than her fair share of ideas and thoughts on this topic than she would ever admit too, are more than I can repay. I especially wish to thank my committee who has never failed to provide the guidance I need to make this work a reality. A special debt of gratitude is owed to Jim Byram and Troy Post, both of these gentlemen gave me my start in public administration and have and continue to be mentors and friends. Last, but most importantly, I thank my wife Katharine and her family for all the moral support and prodding provided along the way. I could not have done it without you. iii Table of Contents Abstract ......................................................................................................................................... ii Acknowledgments ....................................................................................................................... iii List of Tables .............................................................................................................................. vii List of Figures ............................................................................................................................ viii List of Abbreviations ................................................................................................................... ix Chapter 1--Introduction ................................................................................................................1 Statement of the Problem ................................................................................................2 Research Question ...........................................................................................................3 Theoretical Framework ...................................................................................................3 Methodology ....................................................................................................................5 Chapter Summary ............................................................................................................9 Chapter 2--Literature Review and Theory Development ............................................................13 Introduction .....................................................................................................................13 Overview of Municipal Debt ..........................................................................................14 Historical View of Debt Policies ....................................................................................17 Public Budgeting ............................................................................................................24 Growth Machine Theory ................................................................................................27 Regime Theory ...............................................................................................................30 Chapter 3--The Environmentalist‟s Lawsuit? .............................................................................40 iv Sprawl ..............................................................................................................................40 Jefferson County—Polluter! ............................................................................................42 Jefferson County Sued by Slawson .................................................................................44 Judgment Levied .............................................................................................................48 Chapter 4—The Debt Explosion .................................................................................................50 The Consent Decree ........................................................................................................50 Corruption—Part I ...........................................................................................................59 Rate Increases ..................................................................................................................65 Chapter 5—Risky Refinancing ....................................................................................................67 Looting Main Street? .......................................................................................................67 Corruption—Part II .........................................................................................................78 Chapter 6—Subprime Crisis Spillover ........................................................................................85 The Derivatives Market ...................................................................................................85 Auction-Rate Securities ...................................................................................................91 The Occupational Tax .....................................................................................................92 Chapter 7—After Effects and Reconstruction .............................................................................99 Jefferson County: A Casualty of the New Civil War .....................................................99 Alternatives ……………………………………………………………………………112 Chapter 8—Conclusion .............................................................................................................115 Final Thoughts ...............................................................................................................119 References ...............................................................................................................................123 Appendix A—Historical Documents….……………………………………………………….132 v Appendix B—Persons Interviewed…………………………………………………………….135 Appendix C—Semi-Structured Interview Questions…………………………….…………….136 vi List of Tables Table 1—Consent Decree Required Projects ............................................................................. 55 Table 2—Amount of Outstanding Debt Service ......................................................................... 56 Table 3—Contracted Firms and Award Amounts..……………………………………..……...60 vii List of Figures Figure 1—Home of Jack Swann Before Renovations .................................................................62 Figure 2—Home of Jack Swann After Renovations ...................................................................63 viii List of Abbreviations ADEM Alabama Department of Environmental Management ARS Auction Rate Securities BBA Birmingham Business Alliance BoB Bureau of the Budget CAO Chief Administrative Officer CD Consent Decree CDO Collateralized Debt Obligation CEO Chief Executive Officer CFO Chief Financial Officer CIP Capital Improvement Plan CM City/County Manager CRS Cahaba River Society CWA Clean Water Act EPA Environmental Protection Agency ESD Environmental Services Department FBI Federal Bureau of Investigation ICMA International City/County Management Association IDB Industrial Development Board ix IRS Internal Revenue Service Jeffco Jefferson County LGC Local Government Commission LIBOR London Interbank Offering Rate NIH National Institutes of Health NINJA No Income No Job or Assets NPDES National Pollution Discharge Elimination System OCIP Orange County Investment Pool PARCA Public Affairs Research Council of Alabama PIMCO Pacific Investment and Management Company SEC Securities and Exchange Commission SIV Special Investment Vehicle UDC Urban Development Corporation VaR Value at Risk WTSCIP Waste Treatment System Capital Improvement Pl an WWTP Waste Water Treatment Plant x