Jefferson County, Alabama - Charitable and Not-So Charitable Giving by Contractors Leads to Disaster

How harmful can it be for a potential contractor to give money to the favored charities of someone who oversees a county’s finances? And how harmful can it be for a county official to work with people he trusts, rather than competitively bidding out the county’s business?

The answer to both questions, given by the disaster that's hit Jefferson County, Alabama, home to the city of Birmingham, is a lot.

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According to an article in today’s New York Times, a series of transactions in 2001-2003, intended to bring down the interest the county was paying on its sewer system bonds, has brought Jefferson County to the edge of bankruptcy. The transactions included refinancing its debt as well as interest-rate swaps amounting to far more than the bonds.

According to the article, the official who selected an investment banker and advisers (the official was president of the County Commission and the County Finance Committee; the principal adviser was a former state party chair) “chose people who had responded to his calls for money to send children to Bible camp and to support a charitable skeet shoot-off, as well as people who had helped him pay off his many debts.” He also said that he “chose the people he did because he knew they were capable and he trusted them.” According to an article in the Birmingham Weekly, lawyers chosen for the bond deals had given the official pro bono help in the past.

Unfortunately, the person selected to arrange the transactions went to prison in 2005, after the Jefferson County transactions occurred, “in connection with a municipal corruption case in Philadelphia.”

It’s not surprising to find that charitable gifts were used as a way of getting around the law that bars people from buying local government bond business by giving gifts to officials. Gifts to an official’s favorite charities works almost as well as gifts to the official himself. I’ve written about this before, but this case shows how destructive this kind of loophole can be to a local government. Ditto for selecting people an official has worked with before rather than competitively bidding out a contract.

There is a lot more to these transactions, according to the Birmingham Weekly article, which also features a lobbyist who allegedly paid off some of the official’s debts (at least partially with others' money). The article is the equivalent of an article about how to build a bomb: every sneaky way to put personal interests and the interests of one’s friends (and financial saviors) is set out for all to learn from, one way or the other. It’s also a sad tale of what being a shopaholic can lead a man to do.

Not only is Jefferson County at the edge of bankruptcy, but resident’s sewer rates have tripled. The only winners were the advisers and investment bankers, the official’s charities, and, at least in the short run, the official himself, whose debts were allegedly paid off (indirectly, of course) and who is now mayor of Birmingham. There are no signs of his resigning. Perhaps the lesson to be learned from Governor Spitzer is it's better not to create any expectations of being ethical, because then no one will be disappointed in you.

Robert Wechsler
Director of Research-Retired, City Ethics

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