Alabama's Jefferson County, which includes Birmingham, filed for bankruptcy court protection Wednesday in the biggest municipal bankruptcy in U.S. history.
Despite a tentative deal reached with creditors in September to settle $3.14 billion of debt, the county said it had filed for Chapter 9 bankruptcy court protection after county commissioners voted 4-1 to declare insolvency.
The vote by the commissioners, who are elected and not political appointees, came after they met behind closed doors for two days in a last ditch-attempt to restructure the county's debt out of court.
The filing by the county will add to concerns of more problems in the $3.7 trillion U.S. municipal bond market, which last month was hit by the high-profile debt crisis in Pennsylvania's capital of Harrisburg.
Municipal bankruptcies are rare and usually arise from problems specific to the locality in particular. Jefferson County, home to Birmingham, saw its debt escalate in the mid-2000s after it refinanced an upgrade of its sewer system with interest and auction rate bond deals.
Costs ballooned as interest rates rose, and the county has since 2008 teetered on the edge of bankruptcy. With more than $5 billion in total indebtedness, a Chapter 9 filing would surpass that filed by Orange County California, in 1994.
Jefferson County, with a population of about 660,000, is an economic powerhouse for the state and contains some of the richest neighborhoods in the country as well as pockets of urban poverty.
Birmingham, the state's largest city, 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.
Interest on Jefferson County's sewer debt deals spiraled when its debt was downgraded in 2008. The deals also spurred corruption investigations that led to some 22 convictions, and citizens' complaints that they were being forced to pick up the costs of the soured deals.
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.
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.
At this moment, after weeks of intense negotiations, the commission does not have one single agreement from either the receiver or a single one of the creditors, County Commission President David Carrington said before the vote.
The county's biggest creditor, JPMorgan, had wanted to avoid bankruptcy, according to 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 feared larger bills as part of a deal to settle the county's $3.14 billion sewer bond debt.
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 muni 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 said the Jefferson County bankruptcy would have no material impact on its financial results.
(Additional reporting by Matt Bigg in Atlanta, Jessica Toonkel, Joan Gralla and Chip Barnett in New York, and Tom Brown in Miami; Writing and additional reporting by Michael Connor in Miami; Editing by Tom Brown and Carol Bishopric)