Legislators in Alabama's Jefferson County on Wednesday voted 4 to 1 to file for bankruptcy court protection in what would be the biggest municipal bankruptcy in U.S. history.
Despite a tentative deal reached with creditors in September to settle $3.14 billion of debt, county commissioners this week resurrected the threat of a Chapter 9 bankruptcy filing largely because the estimated savings from that agreement had shrunk considerably.
The filing could add to heightened concerns of more problems in the $3.7 trillion U.S. municipal bond market, which has been hit recently by the high-profile debt crisis in Pennsylvania's capital of Harrisburg.
Municipal bankruptcies are rare, usually arising from problems specific to the particular locality. Jefferson County saw its debt escalate in the mid-2000s after it refinanced an upgrade of its sewer system with interest and auction rate bond deals.
But costs ballooned as interest rates rose and since 2008, Alabama's most-populous county has teetered on the verge of bankruptcy. With more than $5 billion in total indebtedness, a Chapter 9 filing would surpass that filed in 1994 by Orange County, California.
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, the governor said in a statement.
Creditors and the county had 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 the 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 Chase & Co, 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 county residents feared larger bills as part of a deal to settle the $3.14 billion sewer bond debt.
Still, the action should not be viewed as a harbinger of more filings in the muni 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, Walls said.