Largest municipal bankruptcy in US history
Jefferson county, Alabama has filed for bankruptcy as a result of a failure to come to agreement with creditors on a $3.14 billion sewer debt.
Federal Judge Thomas Bennett in Birmingham set a December 15 deadline on Thursday for a hearing on whether the county is eligible to file for Chapter 9, the section of the U.S. Bankruptcy Code that covers municipal bankruptcies.
The head of the Jefferson County Commission, which voted 4-1 for bankruptcy, pointed to a $140 million decline in the savings expected from the preliminary deal as the trigger for the filing.
"The terms were set, they were agreed upon, and the final agreement wasn't parallel with those terms," said David Carrington, the commission president.
Carrington also laid blame at the feet of Governor Robert Bentley and the state's Republican-controlled legislature for not calling a special session to raise taxes to help Jefferson County settle its debt.
For the roughly 660,000 residents of Jefferson County, which includes Birmingham, the state's largest city, bankruptcy means a threat to essential jobs and services. More immediately, it means sewer system rate hikes, an added burden on poor people already saddled with some of the highest rates in the country.
"It's terrible for the sewer rate payer," said John Young, a receiver appointed by the Jefferson County Circuit Court to manage the sewer system on behalf of creditors. He said double-digit rate increases were already planned.
The problems with the sewer bonds is a story of corruption and stupidity:
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.
The bankruptcy is expected to hit the muni bond market hard while the debt crisis may affect neighboring counties as well.