November 10, 2011 / 2:54 PM / in 8 years

Huge bankruptcy filing means pain for Alabama

ATLANTA (Reuters) - The decision by Alabama’s biggest county to file for the largest municipal bankruptcy in U.S. history comes as a shock and represents a sharp economic setback for the state.

It is difficult to gauge the precise impact of the decision by Jefferson County to file for Chapter 9 because bankruptcy will take the state into uncharted territory, according to analysts.

“Nothing of this magnitude has ever happened before as far as a municipal bankruptcy is concerned,” said Melissa Woodley, a finance professor at Birmingham’s Samford University and an expert on U.S. municipal debt.

That said, the 4-1 decision taken by commissioners in the historic Jefferson County Courthouse could have an impact in the following ways:

- It will likely make it more costly for the county to raise funds in the bond market and it could have a contagion effect on neighboring counties, analysts said.

- It could rattle the $3.7 trillion U.S. municipal debt market.

- It will tarnish the state’s reputation for fiscal probity, not least because Alabama’s largest city, Birmingham, sits at the center of Jefferson County.

- It could jeopardize the county’s ability to provide services to its 660,000 residents.

- It could also threaten the jobs of county employees.

The largest Chapter 9 filing to date was Orange County, California, in 1994, and the biggest so far during the current U.S. economic downturn was Harrisburg, Pennsylvania, last month.

Bankruptcy means a federal judge will now decide on the terms for debt repayment, according to state Governor Robert Bentley. The county will propose its own terms and another long round of negotiations will inevitably begin.

“It (the bankruptcy decision) is a tragedy. It will be a stain on the state for years to come,” state legislator Cam Ward told Reuters.

“The current commission did everything they could to avoid it. They were dealt a hand of cards and they couldn’t possibly have won with it,” said Ward, a Republican.


Just two months ago, Jefferson County struck a tentative deal to settle its $3.14 billion sewer bond debt with creditors, who include JPMorgan Chase & Co, to settle the bond debt.

That debt, initially accrued as the county upgraded its sewer system, escalated in the mid-2000s through a series of auction rate bonds and bond swaps that were riddled with corrupt deals between county officials, powerful local financial players and Wall Street banks.

Some 22 people have been convicted for corruption over the refinancing.

Interest rates soared in February 2008 when bond insurers downgraded the debt and at that point the county embarked on a seemingly interminable round of negotiations in a bid to settle the debt.

Even so, September’s 4-1 vote raised optimism that a final deal was in sight. In the weeks since then, the possibility of a concrete deal has unraveled for reasons that include the following.

* SPECIAL SESSION: A final deal depended on a special session of the state’s legislature passing a law to allow the county to raise a new tax. Opposition to that special session appeared strong and Governor Robert Bentley did not call one.

* TOTAL DEBT: The total amount of debt, which stood at $2.05 billion after the tentative deal, crept up to $2.19 billion. In September, two commissioners who voted for the deal said they were unhappy with its terms so the prospect of additional payments proved unpalatable.

* RATE RISES: One of the most controversial aspects of the initial deal was the extent of sewer rate rises, set at no more than 8.2 percent. Some commissioners and many constituents balked because the county’s sewer and water rates are already among the highest in the country.

* CREDITOR DISUNITY: Each of the creditors had a different financial stake in the final outcome, thus making it more difficult to secure a deal.

* GENERAL FUND DEBT: Aside from its sewer bond debt the county faced a separate shortfall in its general fund. The failure to resolve this, more than any other factor, tipped the county over the edge, said finance professor Andreas Rauterkus of the University of Alabama at Birmingham.

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