Alabama County Bankruptcy Filing Is Biggest In U.S. History

Alabama's Jefferson County has filed for what is the biggest municipal bankruptcy in U.S. history. The county commission voted 4-1 in favor of seeking bankruptcy protection on Wednesday after a debt-restructuring deal fell apart.

As The Birmingham News reports the history of the more than $4 billion in debt spans a decade and mostly involves a failed sewer construction deal fraught with corruption. Jefferson County is home to Birmingham, Alabama's largest city.

The News reports:

The bankruptcy decision came after commissioners spent about 11 hours over two days huddled behind closed doors on the fourth floor of the Jefferson County Courthouse in Birmingham with their lawyers discussing legal options, including an ongoing attempt to reach a settlement with sewer-debt creditors.

By Wednesday afternoon, they gave up on the settlement, emerged from their closed session and moved down to the second-floor Commission Chamber to vote in favor of bankruptcy — something Gov. Robert Bentley and many of Birmingham's key business leaders had urged them to avoid.

In doing so, Jefferson County's collapse earned a place in the history books, far eclipsing the previous biggest municipal bankruptcy — a $1.7 billion filing by Orange County, California, in 1994 — even when inflation is factored in.

Reuters reports that Jefferson County's problems 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."

Larry Langford, the former Democratic mayor of Birmingham, was among those convicted "for his role in corrupt business deals that fueled the multibillion-dollar sewer debt."

The Wall Street Journal steps back and reports on what this might mean for the larger municipal bond market in the country:

Jefferson County is the fourth local government to file for municipal bankruptcy so far this year, after Harrisburg, Pa.; Central Falls, R.I.; and Boise County, Idaho. A judge has already dismissed Boise County's case, and Harrisburg's right to file is being contested by its mayor and the state. A judge will decide that case on Nov. 23.

"This is a bad thing for market sentiment," said Matt Fabian, managing director of Municipal Market Advisors. "Investors have a deep-seated mistrust of issuers and this will only help justify that mistrust. It shows issuers are more willing than in the past to use bankruptcy."

While the size of Jefferson County's debt is notable, municipal bankruptcies remain rare. Jefferson County is the 49th bankruptcy among U.S. cities, counties, villages and towns since 1980, Mr. Spiotto said. That compares with thousands of corporate bankruptcies each year.

USA Today reports that the the Chapter 9 petition doesn't wipe out the entire $4.1 billion debt. A county commissioner told the paper that it was unclear how much the county would have to pay back.

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