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Jefferson County, AL, has declared the largest municipal bankruptcy in U.S. history, raising concerns about the stability of the $2.9 trillion municipal bond market.
Alabama’s most populous county, with 660,000 residents, was forced to file for protection after state lawmakers failed to back a September agreement with creditors led by JPMorgan Chase & Co. that would have reduced its sewer-system debt of more than $3 billion. capping a more than three-year saga that turned it into one of the biggest casualties of Wall Street’s credit crisis. Gov. Robert Bentley and local leaders worked unsuccessfully for two months to rally support for the deal, Bloomberg Businessweek reported.
“We’ve reached that last resort,” Commissioner Joe Knight said yesterday at the meeting before the 4-1 bankruptcy vote. “We could continue and keep kicking this can down the road, but I think the people of Jefferson County have had enough.”
The Chapter 9 filing leaves creditors including JPMorgan, the biggest U.S. bank by assets, facing hundreds of millions of dollars in losses and may revive concern that defaults may rise in the $2.9 trillion municipal bond market. The move also leaves residents of the county — which includes the state’s largest city, Birmingham — facing unsustainable sewage fees to repay the debt that led to the debacle.
The bankruptcy filing by the Alabama came on the heels of another 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, CA and Central Falls, RI — 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.
The September deal for Jefferson provided $1.1 billion in concessions. It also called for annual sewer-rate increases for the first three years of as much as 8.2 percent, which drew opposition from lawmakers concerned about the burden that would place on the poor. The county also couldn’t get signed commitments from creditors, Commission President David Carrington told Reuters.
There was also frustration over the fact that the estimated savings from the September agreement had shrunk by about $140 million, commission sources said.
The size of sewer-fee increases became a hurdle because many residents, particularly in Birmingham, can ill afford higher costs, according to Commissioner George Bowman. He has said that almost 70 percent of sewer users reside in the two districts with the lowest average incomes.