Alabama's Jefferson County filed for bankruptcy court protection on Wednesday in the biggest municipal bankruptcy in U.S. history.
Commissioners for the county, which is home to Birmingham, the state's biggest city and economic powerhouse, voted 4-1 to declare bankruptcy after meeting behind closed doors for two days in a last ditch-attempt to restructure its debt out of court.
A tentative deal reached with creditors in September to settle $3.14 billion in red ink had been widely expected to avert bankruptcy. But the deal fell apart over what the commission described as creditors' refusal to meet the terms of previously agreed economic concessions.
There was also frustration over the fact that the estimated savings from the September agreement had shrunk by about $140 million, commission sources said.
In September 2011, the commission and receiver entered into a comprehensive term sheet setting forth a framework for the resolution of the sewer system crisis, the commission said in a press release announcing the bankruptcy filing.
Creditors ultimately were unwilling to make the economic concessions contemplated in the term sheet and the receiver made additional demands inconsistent with the term sheet that the commission was unwilling to accept.
The commissioners, who are elected and not political appointees, are the final arbiters over much of the county's business and day-to-day municipal affairs.
The bankruptcy filing by the southern U.S. county will add to concerns about the risks in the $3.7 trillion U.S. municipal bond market, which was hit recently by the high-profile debt crisis in Pennsylvania's capital of Harrisburg.
In addition to Harrisburg, which filed for bankruptcy last month, just two other cities -- Vallejo, California and tiny Central Falls, Rhode Island -- have declared bankruptcy in recent years since the onset of the U.S. financial crisis.
Jefferson County's debt escalated in the mid-2000s when bond issuance deals to upgrade its sewer system soured amid widespread corruption, bribery and fraud charges that led to some 22 convictions.
Costs ballooned as interest rates rose, and the county had teetered on the edge of insolvency since its debt was downgraded in 2008. With more than $5 billion in total indebtedness, the Chapter 9 filing on Wednesday surpassed that filed by Orange County California, in 1994.
Jefferson County, with a population of about 660,000, contains some of the richest neighborhoods in the country as well as pockets of urban poverty and blight.
Birmingham was the scene of one of the fiercest confrontations of the U.S. civil rights movement in 1963 when city leaders and police violently resisted a campaign for desegregation by demonstrators led by Martin Luther King Jr.
Larry Langford, a Democrat and former mayor of Birmingham, was sentenced to 15 years in prison last year for his role in corrupt business deals that fueled the multibillion-dollar sewer debt. Langford presided over the county commission during the height of the bond swaps that led to the run-up of the massive debt.
Alabama Governor Robert Bentley, who as late as Tuesday pledged to call a special session of the state legislature to facilitate the September deal, said the vote to file for bankruptcy was unfortunate.
DARK CLOUD OVER COUNTY
I am disappointed by the commission's decision today, as bankruptcy will negatively impact not only the Birmingham region, but also the entire state, Bentley said in a statement.
Bentley was heavily involved in negotiations with creditors and had twice pushed the county to avoid declaring bankruptcy, fearing its impact on the state's economic reputation. Efforts to forestall bankruptcy had already triggered layoffs of government employees and cuts in municipal services.
There are also widespread fears that the bankruptcy filing could raise borrowing costs for other Alabama governments and school districts.
Creditors such as JPMorgan Chase & Co and the county in September reached a tentative deal calling for Jefferson County's sewer-system debt to be substantially reduced but final terms were not reached.
A sticking point discussed in a commissioners' meeting on Monday was adjustment of a $140 million difference between the originally agreed figure of $2.05 billion the county must repay to creditors. That amount crept up to $2.19 billion because certain parts of the deal terms shifted.
The county has negotiated extensively and in good faith with its creditors and their representatives about restructuring the county's debts out of court, County Commission President David Carrington said in a statement after Wednesday's vote.
Despite the county's best efforts, these negotiations have not produced a deal that fairly treats the county and its citizens, and there is no reason to believe that further out-of-court negotiations will lead to a fair, acceptable result, he said.
The county's biggest creditor, JPMorgan Chase, had wanted to avoid bankruptcy, according to company spokeswoman Jennifer Zuccarelli.
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 for a fair and reasonable solution, Zuccarelli said.
Alabama's attorney general said he would work to ensure that any sewer rate increases in Jefferson County were fair. The issue is highly contentious in the county, as many residents fear larger bills as part of a deal to settle the county's sewer bond debt.
But the sewer system's court-appointed receiver said the bankruptcy filing would inevitably translate into higher fees for the county's sewer system customers.
This utterly irresponsible act makes the dark cloud hanging over Jefferson County even darker, the receiver, John Young Jr., said.
The September settlement would have meant a 6.5 percent rate increase for residential and non-residential customers but now those rises will be significantly larger because of the bankruptcy filing, according to Young.
The news will no doubt cause a lot of selling of municipal bonds in the next few days, said Jason Thomas, chief investment officer at Aspiriant, a registered investment advisory firm with $7.5 billion in assets under management.
There is going to be a lot of selling pressure, and we expect that we will take advantage of it and do a lot of buying, he said.
The action should not be viewed as a harbinger of more filings in the municipal bond market, said Michael Walls, portfolio manager of Waddell & Reed Advisors Municipal High Income Fund and the Ivy Municipal High Income Fund.
This is not systemic to the municipal bond market; it's a situation where there was gross mismanagement of a municipal water and sewer project, Wall said.
In a statement late on Wednesday, JPMorgan Chase said the Jefferson County bankruptcy would have no material impact on its financial results.
(Additional reporting by Matthew Bigg in Atlanta, Jessica Toonkel, Joan Gralla and Chip Barnett in New York; Writing and additional reporting by Michael Connor in Miami; Editing by Tom Brown and Eric Walsh)