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Ala. county files for largest municipal bankruptcy

County manager Tony Petelos stands outside a room as Jefferson County Commission president David Carrington holds a news conference in his office, Wednesday, Nov. 9, 2011 at the Jefferson County Courthouse in Birmingham, Ala.. Leaders of Alabama's most populous county on Wednesday voted to declare an estimated $4.1 billion bankruptcy, the largest for a municipality in U.S. history. County manager Tony Petelos stands outside a room as Jefferson County Commission president David Carrington holds a news conference in his office, Wednesday, Nov. 9, 2011 at the Jefferson County Courthouse in Birmingham, Ala.. Leaders of Alabama's most populous county on Wednesday voted to declare an estimated $4.1 billion bankruptcy, the largest for a municipality in U.S. history. (AP Photo/The Birmingham News, Joe Songer)
By Phillip Rawls and Jim Van Anglen
Associated Press / November 10, 2011

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BIRMINGHAM, Ala.—Alabama's most populous county filed 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.

Perhaps the biggest potential impact will be on the county's 658,000 residents, who could be asked to pay higher sewer rates or taxes, or see county services curtailed. Officials say it's too early to assess other affects, though bankruptcy filings can also lead to layoffs, pension reductions for public workers, and spending cuts on things like schools and roads.

Because of past layoffs and office closings, residents already face hours-long lines for services such as renewing their car tags, and county officials have said previously that services not required by law, like inspections and zoning, could be curtailed to help pay off debt.

Jefferson County resident Hollis Wormsby said he felt like the county had no choice but to file for bankruptcy 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.

The problems were years in the making.

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.

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. That's about half of the county's unrestricted general fund revenue for the fiscal year that ended Sept. 30: $152.5 million.

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 included the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of sewer rate increases.

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 in a federal filing that listed about $458 million in creditors and claims.

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, and 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.

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. But the county could incur millions of dollars in legal fees.

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Van Anglen reported from Birmingham. Associated Press writer Harry R. Weber in Atlanta and AP Business Writer Bernard Condon in New York contributed to this report.