Spotlight on Critical Grassroots Public Administration Issues Michael E. Howell-Moroney is an associate professor of public administration in the master of public administration program at the University of Alabama at Birmingham. His research explores contem- porary problems and salient issues in urban policy and administration. E-mail: mhowellm@uab.edu Jeremy L. Hall is an assistant professor of public affairs at the University of Texas at Dallas. His research focuses on the intersection of public policy, public sector performance, and economic develop- ment. His research has received awards from the National Association of Schools of Public Affairs and Administration and the Southeastern Conference for Public Administration. E-mail: Jeremy.Hall@utdallas.edu 232 Public Administration Review • March | April 2011 Michael E. Howell-Moroney University of Alabama at Birmingham Jeremy L. Hall University of Texas at Dallas Following failed auctions for sewer debt in April 2008, major bond rating companies downgraded Jefferson County, Alabama’s bond rating to D (default) triggering massive mandatory payments by the county to its creditors. At the time of writing, the county teeters on the brink of actual default and bankruptcy, unable to pay service on its $3.3 billion sewer debt portfolio. If the county defaults, it will be the largest municipal bankruptcy in United States history, eclipsing Orange County, California’s 1994 default. Te intriguingly complex tale of the Jefferson County debt crisis is recounted here by identifying and examining failures of transparency and accountability by local bureaucratic and political actors, private financial institutions, as well as the larger regulatory framework governing public finance. Enhanced regulation of local government and the financial sector plus greater local government capacity to close accountability gaps and thus prevent future crises of similar scale in this or other jurisdictions are recommended. J efferson County, Alabama, is not a large county by national standards; according to the latest 2007 census esti- mates, it ranks ninetieth among all counties nationally in popula- tion. Yet when it comes to bond debt, the county unfortunately enjoys a much higher ranking. With its $4.6 billion debt, the county is sixth in the nation according to recent estimates (Velasco 2005). The county carries a varied composition of general obligation and revenue debt, mostly for school and sewer purposes, but the lion’s share, more than 70 percent of the debt, is composed of the county’s massive $3.3 billion sewer bond portfolio. In an effort to save on interest expense, the county turned to complicated financial derivative instruments known as interest rate swaps. Briefly defined, swaps are an exchange of fixed- and variable-rate payment obligations between two parties. For example, one party agrees to pay a fixed rate to the second party, while the second party pays a variable rate to the first. Swaps can be used to hedge against uncertainty or speculatively to maximize returns or minimize loss. Swaps are not new to public finance, and numerous state, county, and municipal governments use them as a tool to manage interest costs associated with debt. However, by national standards, Jefferson County engaged in a disproportionately large number of swap agreements, making it extremely vulnerable to exog- enous macroeconomic shocks. In April of 2008, Jefferson County captured national at- tention as its bond rating, awarded by Moody’s and oth- er bond rating entities, witnessed a precipitous decline, in part be- cause of financial spillover effects from the subprime mortgage crisis. Tis decline in the county’s bond rating, combined with an inability to sell or borrow funds on the open market without huge interest penalties, put the county in a precarious financial position. Te rating crash had an immedi- ate financial impact, triggering collateral posting requirements in its swap agreements and forcing the county to make a sizeable payment that it could not afford. Although the county bought time through a series of negoti- ated forbearance agreements with its creditors, its sewer bonds hold a default rating at the time of our writing. If the county does not broker a solution, it will become the new “winner by default,” eclipsing Orange County’s $1.6 billion default in 1994. Te Jefferson County case presents a troubling and vivid picture of systematic breakdowns in Waste in the Sewer: Te Collapse of Accountability and Transparency in Public Finance in Jefferson County, Alabama In April of 2008, [Jefferson County, Alabama] captured national attention as its bond rating . . . witnessed a precipitous decline, in part because of financial spillover effects from the subprime mortgage crisis. This decline . . . combined with an inability to sell or borrow funds on the open market without huge interest penalties, put the county in a precarious financial position.