Ala. County Files for Largest Municipal Bankruptcy

Thursday, 10 Nov 2011 09:43 AM

 

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MONTGOMERY, Ala. — Alabama's most populous county filed what became the largest municipal bankruptcy in U.S. history in an effort to retake control of its beleaguered sewer system and wipe away as much of its whopping $4.15 billion in debt as possible.

Jefferson County's Chapter 9 filing on Wednesday gives it protection from creditors while it develops and negotiates a plan for adjusting its debts. It could accomplish that by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

But there are risks. Perhaps the biggest is the potential impact on the county's 658,000 residents, who could be asked to endure even higher sewer rates than were contemplated under the deal with creditors that fell through. That's because the sewer debt, which represents the bulk of what the county owes, is secured against net revenues from the sewer system, and the court will determine how much of that debt remains on the books and how the county will repay it. Unrestricted revenue in the county's general fund totaled only $152.5 million in the fiscal year ended Sept. 30.

The problems were years in the making.

Its debt ballooned after a federally mandated sewer project was beset with corruption, court rulings that didn't go its way and rising interest rates when global markets struggled.

Since 2008, Jefferson County tried to save itself the cost and embarrassment of filing for bankruptcy. But after three years, commissioners voted 4-1 to bring the issue to an end.

"Jefferson County has, in effect, been in bankruptcy for three years," said Commissioner Jimmie Stephens, who made the motion to file for protection in federal bankruptcy court in northern Alabama.

Just two months ago, the county seemed to strike a deal with creditors that would let it avoid making history.

But the sides couldn't come together on how to pay about $140 million of the total, Stephens said. Also weighing heavily in the decision, according to the filing, were the actions of a receiver appointed for the sewer system as part of the settlement efforts. The county's lawyers say the receiver wanted to raise sewer rates 25 percent and demanded the county immediately pay him $75 million in cash from its general funds.

Ben Brooks, a professor of finance at the University of Alabama, said bankruptcy would give the county a chance to move past the financial problems. The fallout from the fraud and corruption in the sewer program had been hanging over Jefferson County for years.

"The level of uncertainty has been holding back economic development for far too long," Brooks said.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co included the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of sewer rate increases. JP Morgan said it had worked hard to avoid a bankruptcy filing and was disappointed by the decision.

"We offered very substantial financial concessions to make the deal happen while keeping sewer rates within the parameters proposed by the county," the company said in a statement.

Commission president David Carrington said the filing was not a negotiation ploy.

The size of Jefferson County's bankruptcy overshadows the one filed by record-holder Orange County, Calif., in 1994 over debts totaling $1.7 billion.

Pennsylvania's capital city of Harrisburg recently sought bankruptcy protection under similar circumstances as it struggled with about $300 million in debt from a trash incinerator that began operating in 1972.

In the 1990s, a federal court forced Jefferson County — home to Alabama's medical and financial centers and the state's largest city, Birmingham — to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards. Officials used bonds to finance the improvements.

Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling. Besides the sewer debt of $3.14 billion, the county faces a separate shortfall of more than $50 million in its operating budget because courts struck down a major local tax as unconstitutional. It listed other debts in its bankruptcy petition of $1.01 billion.

The bankruptcy filing likely won't affect other municipal bond rates much, if at all, said Matt Fabian, managing director at research firm Municipal Market Advisors.

"Big investors — mutual funds, insurers, banks— have been assuming the worst all along," he said. "If another county had filed, that would be a different story."

The market has been on edge for a while, with investors worried about rising defaults from local governments borrowing more to maintain services because of plunging tax receipts. The doomsayers have been wrong — so far. Widespread defaults never materialized.

Still, for individual investors, the default could make them want to stay away from the bonds in general, he said.

Jefferson County's problems multiplied when loan payments rose quickly because of increasing interest rates as global credit markets struggled. Soon the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

One benefit for the county: Chapter 9 is different than other chapters in the bankruptcy code in that the law does not allow the court to order the municipality's assets be liquidated and distributed to creditors. The court's functions are generally limited to approving the petition, confirming a plan of debt adjustment, and ensuring implementation of the plan.

A big negative will be the millions of dollars in legal fees the county could incur. A municipality has authority to borrow money during a Chapter 9 case as an administrative expense, and it can employ professionals without court approval.

___

Associated Press writers Harry R. Weber in Atlanta, Jim Van Anglen in Montgomery and AP Business Writer Bernard Condon in New York contributed to this report.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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