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Ala. county to file largest municipal bankruptcy

Leaders of Alabama's most populous county on Wednesday voted to declare an estimated $4.1 billion bankruptcy, the largest for a municipality in U.S. history.
/ Source: The Associated Press

Alabama's most populous county filed the largest municipal bankruptcy in U.S. history Wednesday, years after being plunged more than $4 billion into debt by a corruption-riddled sewer project.

Just two months after it seemed Jefferson County could stave off embarrassment by striking a deal with creditors, talks broke down over about $140 million, said Commissioner Jimmie Stephens, who made the motion to file for the protection. Since 2008, commissioners have tried to avoid the move to settle the debt, which resulted mostly from a mix of outdated sewer pipes, the lagging economy, court rulings and public corruption.

The filing does not wipe out the whole $4.1 billion, said commission president David Carrington, who wasn't certain how much the county will have to pay back. A plan would have to be worked out in bankruptcy court and approved by a judge and at least one group of creditors, Carrington said. The bankruptcy's financial burden for residents and employees likely won't be known until that plan is in place, he said.

Still, the four men and one woman on the board in their 4-1 vote decided it was time to bring the issue to an end and remove the cloud hanging over the county, home to Birmingham, the state's largest city, commissioners said.

"Jefferson County has, in effect, been in bankruptcy for three years," Stephens said.

The county of about 658,000 residents struck a preliminary deal with Wall Street bankers in September, but, despite that being a hopeful sign, there was always the possibility that bankruptcy would be necessary.

The deal required state lawmakers to approve a mix of local tax hikes, budget changes and other legislation to resolve the debt. However, Republican Rep. Paul DeMarco of Homewood, co-chairman of the Jefferson County House delegation, said the governor never called the Legislature into special session to find a resolution because there never was a final plan.

The Republican governor said he was ready to call that session but was never given the chance.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co included the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of sewer rate increases.

"JPMorgan worked very hard with the county and other creditors to avoid a bankruptcy filing," the financial company said in a statement. "We offered very substantial financial concessions to make the deal happen while keeping sewer rates within the parameters proposed by the county. While we're disappointed by the county's decision to file, we will continue to work toward a fair and reasonable solution."

Carrington said the filing was not a negotiation ploy. Also, he said consumers likely would be saddled with rising sewer rates to help pay off the debt, but he wasn't sure how much.

If Jefferson County's bankruptcy is approved, it would overshadow the one filed by record-holder Orange County, Calif., in 1994 over debts totaling $1.7 billion.

Pennsylvania's capital city of Harrisburg recently sought bankruptcy protection under similar circumstances as it struggled with about $300 million in debt from a trash incinerator that began operating in 1972.

In the 1990s, a federal court forced Jefferson County — home to both Alabama's largest city, Birmingham, and its medical and financial centers — to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards. Officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling. Besides the sewer debt, the county faces a separate shortfall of as much as $50 million in its operating budget because courts struck down a major local tax as unconstitutional.

The bankruptcy filing likely won't affect other municipal bond rates much, if at all, said Matt Fabian, managing director at research firm Municipal Market Advisors.

"Big investors — mutual funds, insurers, banks— have been assuming the worst all along," he said. "If another county had filed, that would be a different story."

The market has been on edge for a while, with investors worried about rising defaults from local governments borrowing more to maintain services because of plunging tax receipts during the terrible economy. The doomsayers have been wrong — so far. Widespread defaults never materialized.

Still, for individual investors, the default could make them want to stay away from the bonds in general, he said.

"They think they've been misled about the risk of default. This doesn't help," Fabian said.

Still, Gov. Robert Bentley said the filing would hurt the entire state, not just the Birmingham area.

"By filing for bankruptcy, the county commission now relinquishes control of its affairs into the hands of a federal bankruptcy judge," Bentley said in a statement. "The Jefferson County sewer debt crisis has been an impediment to economic growth in the state, and the bankruptcy filing will now be an even greater challenge to overcome."

Jefferson County's problems multiplied when loan payments rose quickly because of increasing interest rates as global credit markets struggled. Soon the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

Bentley said his administration has worked closely with commissioners, creditors and legislators to hammer out the best deal possible for county residents and ratepayers. He said he is fundamentally opposed to bankruptcy.

"I believe if you borrow money you need to pay your debts," he told reporters while attending a state school board meeting. He said he had offered to call the Legislature into special session to pass anything needed to complete an agreement with creditors.

"We had put everything in place to help them solve their problem," Bentley said. "These banks have to be paid."

Attorney General Luther Strange released a short statement about the decision, saying his office would focus on ratepayers during any bankruptcy proceedings.

Ben Brooks, a professor of finance at the University of Alabama, said, "Bankruptcy is a good thing. The sooner Jefferson County can get his behind them the better."

He said the financial questions and fallout from the fraud and corruption in the sewer program has been hanging over Jefferson County for years and something had to be done to bring it to an end.

"The level of uncertainty has been holding back economic development for far too long," he said.

He said Jefferson County was negotiating with the same investment banks that made big profits off the bond deals. He said the investment banks offered some concessions, but it was not enough to make the sewer system viable.

"The last thing you want to do is have Jefferson County back in this same problem in three to five years," he said.