Municipal bankruptcy in Alabama largest in US history

Municipal bankruptcy of Alabama's Jefferson County is the largest in American history. But will the county surrounding Birmingham, Ala. emerge stronger from its municipal bankruptcy?

Dennis Lathem/Birmingham Regional Chamber of Commerce/AP/File
This file photo provided by the Birmingham Regional Chamber of Commerce shows the skyline of Birmingham, Ala. Leaders of Alabama's most populous county have voted to file an estimated $4.1 billion bankruptcy, the largest municipal bankruptcy in U.S. history.

The biggest municipal bankruptcy in American history could leave residents of Alabama's most populous county paying astronomical rates for public services performed by a skeleton crew of county workers. Or it could simply mean tightening the belt another few notches, depending how much of Jefferson County's $4.15 billion debt will have to be paid.

It's even possible that, just as companies have benefited from bankruptcy, that the county surrounding Birmingham will emerge stronger for it.

For now, much is uncertain for following the county's Chapter 9 filing on Wednesday. The full impact on its 658,000 resident's won't be clear until after a judge approves the move at a hearing next month and local officials negotiate a plan with creditors for adjusting its debts. The outlook among some officials was grim a day after the filing, while others defended the move.

The receiver appointed to run the sewer system's finances said he expects residents to see significantly higher sewer rates, while the lone county commissioner to vote against the bankruptcy predicted that damage to the county's image could drive away businesses and residents, lowering its tax base. An investment researcher who studies government finances said that Jefferson County could have a harder time borrowing money to build infrastructure, and the pain could spread to other cities.

Municipal bankruptcy filings elsewhere have also led to higher taxes, pension reductions for public workers and spending cuts on schools, roads and other infrastructure.

"We are in uncharted territory. Nobody has ever done anything like this on this level," said Jefferson County Commissioner George Bowman, who opposed his four fellow commissioners in the vote.

Commission President David Carrington said Thursday that unrelated fiscal problems already were necessitating cuts in services and hundreds of jobs, and the bankruptcy filing would actually keep those from being as deep. He wouldn't provide specifics.

Because of the past layoffs and office closings, residents already face hours-long lines for services such as renewing their car tags. Bowman said the county has already cut 500 jobs through layoffs and attrition in the last six months was likely to get rid of 1,000 regardless of the bankruptcy.

Some were already beginning to worry about how the bankruptcy could affect their wallets. Lifelong Birmingham resident Charlie Bell said his monthly sewer bill recently went up to $27, and he's fearful for what's next.

"I've never quite seen it this bad, as long as I've been alive," the 56-year-old said of the county's fiscal woes.

The predicament is the culmination of years of problems. The county's 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.

The county had been working since 2008 to avoid the cost and embarrassment of the bankruptcy filing. There appeared to be a breakthrough two months ago when the county and its creditors gave preliminary approval to a settlement.

But as the details were worked out, the sides couldn't come together on how to pay about $140 million of the total, said Commissioner Jimmie Stephens.

Also weighing in the decision was a dispute between the commission and the court-appointed receiver, which continued to play out Thursday. The commission asked the bankruptcy judge to remove John Young Jr. as receiver and let the county run the sewer program. Young filed court papers Thursday saying the federal court can't remove him because he was appointed by a state court judge to oversee the insolvent system.

Young said the bankruptcy would result in sewer rate hikes that could be double what the dashed settlement would have required. He said politics was a factor in the commission's decision to file bankruptcy.

"Politicians don't want to be attached to rate increase and tax increases, and both were going to be necessary," he said.

But an influential money manager of retirement funds for state employees said many suspected thebankruptcy was coming because even with $1 billion in concessions under the proposed settlement, the debt was still too big for the sewer system to cover based on its annual revenues.

"The debt was so huge you didn't have any options," said David Bronner, CEO of the Retirement Systems ofAlabama.

He said a bigger factor in the county's cutbacks will continue to be the shortage of money caused after an occupational tax was struck down in 2009.

Some outside observers said bankruptcy was the right move. Chicago bankruptcy attorney James Chatz, who wasn't involved in the Alabama case, said the filing allows all sides to have a moment of calm and then try to reach an agreement. In the meantime, Jefferson County can continue to run its operations and pay its bills.

"I think there is a deal to be made over a long, long period of time," he said.

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 bankruptcyprotection under similar circumstances in a federal filing that listed about $458 million in creditors and claims.

To try and keep the bankruptcy from hurting its image further, Gov. Robert Bentley said Thursday he would be working to do damage control with the companies that had loaned Jefferson County money.

"We want to make sure the Jefferson County bankruptcy won't hurt Huntsville and other Alabama cities when they try to borrow money," he said.

But Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management in Oak Brook, Ill., said the bankruptcy will make it harder and more expensive for Birmingham and Jefferson County to borrow money, and it could affect other cities and counties in Alabama.

"People will be looking at the state in a more careful eye," he said.

Still, some residents were sanguine. Hollis Wormsby said he felt like the county had no choice but to file forbankruptcy and that its decaying infrastructure was going to necessitate fee increases one way or another.

"This is happening in every major city in the country. Fees are going to go up," he said Thursday.

William Mills, a lawyer who lives in Jefferson County, said bankruptcy is never desirable, but the county must get the problem solved. Its debts aren't going to go away.

"We need to get this behind us," Mills said.

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