the obama camp is casting ryan as right wing i'ding on lock. they are calling for a no-fly zone. the president of the syrian national council such a move would show president assad's regime that the rebels are serious. meanwhile, the arar league postponed a meeting. after one of its members fell ill. i'm kelly wright. now, we take you back to fox news reporting. now, the biggest local government bankruptcy of all. $4 billion. it took some doing. greed, income p incompetentencd

ol >> bank run to the tune of 4 billion. >> what words would you use to describe the financial situation in jefferson county? >> hopeless. at this junk fuhr. >> hopeless? >> hopeless. >> jimmy stevens is jefferson county's district three commissioner. he was elected after the crisis began. >> how did it stop to go after the rails? >> they attempted to build a cadillac when a chevrolet would have worked as well. >> this is not a tale about cars but sewers and the sort of mess that seens to the surface when local politicians with big ideas get mixed up with wall street bankers looking for big fees. a financial sinkhole in a swamp of corruption. it begins back in 1996. jefferson's sewer system was

leaking raw sewage into rivers and streams and the county signed a federal consent decree to fix the problem. the costs huge, estimated at between $250 million and about a billion dollars. >> where did the county get the money to undertake such a massive project like this? >> if went to investment bankers, went to the bond market and made their pitch and it was underwritten and sold as a good investment. >> at this facility alone the county spent more than $200 million on improvements and repairs earning jefferson county the nickname of having the taj mahal of sewer systems. >> i think in a lot of ways this facility is emblematic of the problems the system has. >> david denar has been in charge of running the jefferson county sewer system since 2008. >> the building we are in now what does it do? >> this is a peak flow pump station. >> it was built in 2004. soon thereafter problems began. >> we had to spend $35 million

in repairs. >> what did the building cost originally. >> 50 million. >> and had to spend $30 million to repear it? >> to put it in regular operating condition, yeah. >> when did go wrong there? >> the people did not operate on a budget and used local engineers to manage a problem that required a lot more expertise than was here. >> some of the sewers green lighted were not even included in the consent decree. how did that happen? >> jefferson county won'ted to bore are a super sewer underneath to get to area that would be developed. when they got to the point the outcry from environmental or rate payer groups was so loud they killed the project outright, leaving jefferson county with the tunnel to no where. when it became clear the county wouldn't be able to make the payments onts bonds officials went back to wall street looking to refinance.

>> original debt service represented $2.4 billion. 98% of that was fixed debt and investment bankers said we can go to a variable rate interest and add derivatives to that to synthetically make that lower. >> the new instruments that wall street had generated were so complicated that the average person even the finance person could not understand it. >> tony patellas is the jefferson county manager. he said those instruments exploded jefferson county's debt without any one realizing. >> it we were overextended by 85% and the folks that insured our bonds should have known better. >> when the market crashed in 2008 jefferson's bonds dropped to junk, allowing lenders to demand payment in full. >> they called everything in and we were unable to pay. today, jefferson county is debt over $4 billion. we are in bankruptcy.

the largest bankruptcy in the history of a local government in the united states. >> did wall street really take jefferson county for a ride here? >> i leave they did. >> a federal criminal investigation of the sewer deal found that was the case. but wall street got a number of help from a number of people with their hands out. >> we had 21 people that either plead guilty or went to prison. commissioners, employees and contractors. >> that included former commissioner and birmingham mayor larry langford. sentenced to 15 years for accepting thousands of dollars in cash and gifts from one of the bankers. former commissioner gary white. ten years for accepting bribes from an engineering company that worked on the sewer lines. mary buckaloo probangs after lying to the grand jury. chris mcnair serving five years for bribery and conspiracy to solicit bonds. bond underwriter jp morgan settled with the sec, paying

the county $25 million and the sec and a. the bank alleged to have bribed friends of jefferson county commissioners. >> there was definitely malfeasance in the whole use of the swaps et cetera. >> but the president and ceo of assured guarantee which reinsured. so sewer bonds says the sins of wall street and corrupt politicians shouldn't let jefferson county off the hook. >> i didn't vote for that project, they did. >> what really steams federico is that they killed a deal that would have avoided bankruptcy. bond holders offered to forgive a billion dollars of the sewer debt if state lawmakers allowed the county to raise taxes to pay the rest. now, assured guarantee has to pay up. we should work together. >> at a certain point when you

can't meet your financial obligations and the settlement that we had was getting farther he away instead of closer to us we had no choice. >> is it a cautionary tale for other counties across the country? >> absolutely is. you have got to live within your means. >> welcome back. lou dobbs from the fox business network. the president of assured guarantee said his company was going to be able to be fine even in the current environment. if there was a lot of defaults would it be like a domino effect in a a worst case scenario? >> if it reached co con tagion levels that would be a l calamity. >> how bad could a municipal bankruptcy be for the people who live there? who live there? worse than you c

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if your town had out of control debt could that truly affect your life? you wouldn't ask if you spent some time in stockton, california, like dan springer did. spend a night on the tough streets of stockton and you really sense the stakes for the city. >> do me a favor. just take your hands out of your pockets for me. >> and the people that live

here. pretty much life and death. >> if the officers disappear the gang bangers will be here in a heart beat. >> since 2010 the city has had to slash a quarter of its police force because they borrowed more than it can pay and promised more to unions than it can deliver. police can't respond to all 911 calls and that meant more crime. serious crime. >> we have seen a spike in the violent crime and in the homicides. >> stockton is falling apart. it is a horrible thing to see. >> fred siegel of the manhattan institute has written extensively about cities like stockton going broke. >> stockton is a city in the midst of terrible social breakdown. not justice cal collapse but social collapse and the two are intertwine. >> stockton in the middle of the fertile farmland of california's central valley. also an inland seaport

connected to san francisco bay. a navy base here anchored a bluent 20th century blew collar economy. but by the 1990s, the base and many of the factories were gone. stockton's signature waterfront had become a place to avoid. an johnson was on the city council then. >> the council and mayor at the time said we need to fix this problem in the heart of our city. >> with taxpayers' money and a seemingly limitless ability to issue municipal bonds stockton tried to spend its way back to prosperity. >> it was going to be remade and part of the greater bay area. >> $24 million for a minor league baseball park. $150 million for an 11,000 see the arena. 30,000 per slip for a yacht marina next door to new million dollars town homes. >> risky and expensive projects

but at the same time your city employees were getting extremely generous packages in pay and in benefits. why didn't anybody put up their hand and say wait a minute, this is insanity. >> there was a failure in leadership. they felt that the money would continue to roll in and property values would continue to rise. >> and then in 2008, the stock market crashed. real estate prices plunged. the city was suffering double digit unemployment at the same time property and sales revenue went off a cliff. when the city moved to reduce staffs and trim salary, benefit and pension packages the police union not only resisted. it launched an ad campaign that johnston look as a little short of a threat. >> they put up billboards which said welcome to the most dangerous city in california stop laying off cops. >> we wanted something to grab their attention. >> bill huddle is the vice president of the president

union. >> what about the blood splatter running tally. >> to let everyone know this would cause more crime and havoc and violence in the city. >> totally irresponsible and totally bullying. when you don't have the money you don't have the money. >> last february, stockton defaulted on $32 million in bonds. it declared bankruptcy. the biggest u.s. city to do so. meanwhile. >> we have is to stay locked up. >> folks we spoke to sense that for them life in stockton was likely to get worse. >> when we return, fixing a city that is broke. two democratic may 84s trying to get it done -- mayors trying to get it done -- mayors trying to get it d these fellas used capital one venture miles for a golf getaway. double miles you can actually use... but mr. single miles can't join his friends because he's getting hit with blackouts. shame on you. now he's stuck in a miniature nightmare. oh, thank you. but, with e capital one venture card... you can fly any airline, any flight, any time.

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this hour we have told you about cities bankrupted and lives shattered by folly, greed

and corruption. can any one turn the towns around? meet two democratic mayors trying and aair rently making progress. even cutting union pensions and benefits. >> the private sector is doing fine. where we are seeing weaknesses in the economy have to do with state and local government. >> both parties worry about cities going broke. but they seldom agree on how to fix the problem. >> because i'm sure that the president of the united states is not getting his talking points from the big government union bosses in washington. >> now, torn between the party most powerful supporters the realities of the city budgets. >> they are bumping up against liberal interest.

not enough money for basic services and roads. >> that is the case in san jose, california whose democratic mayor are chuck reid took office in 2007. >> what role did the public sector unions and their contracts really play in your fiscal crisis? >> most of our costs were driven by increasing salaries and pension benefit and those came out of the '90s in the go-go years when we had money. >> the average cost for a police officer and firefighters was $200,000. >> a year. >> what steps did you take to stop the bleeding. >> we cut everybody's pay by 10% starting with me all the way down to it all of the unions. everybody took a 10% pay cut. >> he cut city services, too. but that still left a $115 million deficit. it was time for a desperate measure. or as it became known, measure b. >> what exactly was that? >> measure b was a ballot when slur to' lou the voters to decide whether or not we are

going to ten to cut services or bring down the cost of pensions. >> it would save the city billions over time but voters had to approve it first. that was hardly a slam dunk in a county that vot voted 70% for obama in 2008. reed pushed his case hard, demonizing city workers says firefighter robert s api en. >> trying to convince the public things were bad in the city because of employees. in some cases people have been accosted in grocery stores. >> from the firefighters and police officers perspective have you heard the stories they have been verbally abused and treated with scorn? >> there have been some instances of that but the facts are difficult and the facts are we have cut services over and over and over again to fund very expensive retirement benefits. >> last june despite strong union opposition, 70% of san

jose voters, the same number that supported president obama in '08 vote the for measure b. reed got his victory the same day scott walker easily is survived a union led recall challenge. but the san jose democrat bristles at the comparison. >> lots of people tried to draw the parallel with san jose and wisconsin. it is not a good analcy. >> analogy. >> he says he wants to force the union to accept cuts while walker curtailed some of their bargaining rights. >> in san jose we negotiated with the unions hundreds of hours and they are are still an important part of what we have to deal with. >> in providence, rhode island, mayor tavares feels the same way. he took office in 2012. >> i came into office expecting the deficit just not one of the magnitude we found. >> he acted quickly, notifying

all 1934 providence teachers they could lose their jobs come summer. eventually he struck an agreement with the teachers' union that saved almost all of their jobs. and tens of millions of dollars. >> good to see you. >> nice to see you. >> he then approached the police and fire unions and got them to it agree to big cuts as well. >> he said i need your help. i can't do that without you. >> paul dowdy is president of the providence firefighters. >> if you have any solutions that you think will help please i'm open to them. i will do almost anything and that was over a sandwich. >> the unions knew they had to deal with tavares says nicole gelinas. >> they said if we don't vote for this we may get a lot worse if the city goes bankrupt. we would rather give back a little now than a bit later. >> the unions have not yet come around to that way of think back in san jose. >> no part of measure b will be

implement. >> instead, firefighters and police sued claiming measure b is unconstitutional. reed is standing firm. >> what is the one thing that keeps you up at night. >> the long-term fiscal impacts of these problems. spend the money if you have it. if you don't have it, don't spend it. >> we began this hour from this spot because wall street is the center of modern finance. but we end here on a different thought. behind me is federal hall. that is where our national government first met after the constitution was is ratified. one of the framers gravest concerns is that the nation could be profoundly weakened if debts run up by the states were not handled in a responsible way. not everyone agreed about what to do then and, yes, the issues are different today but two core ideas of the founders still apply. first, out of control debt can destroy is country's ability to chart its own destiny.

second and even more crucial, in crisis the exceptional character of the american people is the most important asset we possess. that is our program. i'm bret baier. ♪ [ slap! ] [ slap! sp! slap! slap! ] ow! [ male announcer ] when your favorite foods fight you, fight back fast with tums smoothies. so fast and smooth, you'll forget you had heartburn. ♪ tum tum tum tutums [ male announcer ] tums smoothies. he speaks a weird language... [ gargling ] drinks green stuff. he says he's from albuquerque. i'm not buying it. i mean, just look at him. and one more thing -- he has a spaceship. [ whirring ] the evidence doesn't lie. my dad's an alien.

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