BIRMINGHAM, Ala, (Reuters) – Alabama’s Jefferson County filed for bankruptcy court protection yesterday in the biggest municipal bankruptcy in U.S. history.
Despite a tentative deal reached with creditors in September to settle $3.14 billion of debt, the county said it had filed for Chapter 9 bankruptcy court protection after county commissioners voted 4-1 to declare insolvency.
The vote by the commissioners, who are elected and not political appointees, came after they met behind closed doors for two days in a last ditch-attempt to restructure the county’s debt out of court.
The filing by the southern U.S. county will add to concerns of more problems in the $3.7 trillion U.S. municipal bond market, which last month was hit by the high-profile debt crisis in Pennsylvania’s capital of Harrisburg.
Municipal bankruptcies are rare and usually arise from problems specific to the locality in particular. Jefferson County, home to Birmingham, saw its debt escalate in the mid-2000s after it refinanced an upgrade of its sewer system with interest and auction rate bond deals. Costs ballooned as interest rates rose, and the county has since 2008 teetered on the edge of bankruptcy. With more than $5 billion in total indebtedness, a Chapter 9 filing would surpass that filed by Orange County California, in 1994.
Jefferson County, with a population of about 660,000, is an economic powerhouse for the state and contains some of the richest neighborhoods in the country as well as pockets of urban poverty.
Birmingham, the state’s largest city, was the scene of one of the fiercest confrontations of the U.S. civil rights movement in 1963 when city leaders and police violently resisted a campaign for desegregation by demonstrators led by Martin Luther King Jr.
Interest on Jefferson County’s sewer debt deals spiraled when its debt was downgraded in 2008. The deals also spurred corruption investigations that led to some 22 convictions, and citizens’ complaints that they were being forced to pick up the costs of the soured deals.
Alabama Governor Robert Bentley, who as late as Tuesday pledged to call a special session of the state legislature to facilitate the September deal, said the vote to file for bankruptcy was unfortunate. “I am disappointed by the commission’s decision today, as bankruptcy will negatively impact not only the Birmingham region, but also the entire state,” Bentley said in a statement.
