Jefferson County Fights to Keep Scandal Settlement Money

Jefferson County, Ala., is rallying to protect the settlement it received as a result of its disastrous sewer-debt deal from flowing back to Wall Street.

And it’s the type of dispute that has potential to draw more ink from the same kind of vampire squid furor that’s fueling anti-Wall Street protesters.

At issue is a bid by the financial expert who’s running the county’s debt-clogged sewer system for a piece of a $75 million settlement that J.P. Morgan Chase & Co. was forced to pay in the aftermath of the $3.2 billion deal.

J.P. Morgan officials wrote that check after the U.S. Securities and Exchange Commission accused it of improperly courting Jefferson County elected officials, some of whom ultimately went to jail.

The request from sewer controller John Young has been gnawing at the nerves of county officials who fear the settlement money will flow back to the community of financiers that helped get them into such hardship.

“The bottom line behind all this is what the Occupy Wall Street people would call greed,” said attorney Kenneth Klee, who represents the county in what’s now the biggest municipal bankruptcy in U.S. history. “From the perspective of more conservative people, this is maximizing return on investment. One person’s greed is another person’s clever dealings.”

Young’s request is a top reason why the county filed for Chapter 9 bankruptcy in November, Klee said. That filing empowered the county, which encompasses the city of Birmingham and roughly 658,000 residents, to ask a bankruptcy judge to oust Young, who has managed the wastewater treatment system’s finances for more than a year. With Young out of the picture, the settlement money would remain safely in the county’s coffers.

Judge Thomas Bennett of U.S. Bankruptcy Court in Birmingham, Ala., has already heard both sides of the argument over who should run the sewer system throughout the bankruptcy case. He’s expected to reveal his decision by early January.

County leaders have butted heads with Young since his appointment, accusing him of favoring Wall Street financial titans over residents. In June, Young suggested that the county should raise its sewer rates by 25% to help repay bondholders—an amount county officials said was far too high.

Young’s specific request for the settlement money is a bit nuanced. He explained that he wants a piece of that settlement to create a pool of money that low-income residents could tap to pay sewer bills they can’t afford.

Under the airtight restrictions, Young said he’s barred from creating that fund himself using revenue that trickles in as residents pay their bills.

As trustee for some of the county’s sewer debt, Bank of New York Mellon Corp. distributes the money the sewer system collects. From there, presumably all types of folks—pension funds, investment funds and individual investors—sit at the end of the payment line.

“These bondholders are not all banks. There are people who need this money,” Young said at one point when debtholders were at risk of missing out on a payment.

Jefferson County commission president David Carrington still calls it a case of robbing Peter to pay Paul, pointing out that the money would still circulate back to sewer debtholders. And that settlement money was throwing the cash-starved county a bone after it was put through debt-swap hell.

“It’d be like I’m going to penalize you for something you did wrong, but take [the money] out of your pocket,” Carrington said.

County leaders have found other ways to ruffle debtholders since the bankruptcy began. In general, municipal financiers who put up money to pay for projects like sewer upgrades and parking garages expect their repayment money to trickle in even if the borrowing municipality files for Chapter 9 protection.

If the Jefferson County’s sewer overthrow works, they’d put all of that sewer repayment money in a pool and set it aside until they’re finished drafting a plan that sets out how creditors will be repaid.