From corrupt and incompetent local officials to Wall Street's credit crisis and toxic bonds, there was plenty of blame to go around Thursday, after Alabama's Jefferson County declared the biggest municipal bankruptcy in U.S. history.
The county, once a leading industrial hub in the U.S. Deep South, filed for bankruptcy court protection on Wednesday after failing to reach final agreement on terms of a preliminary deal with creditors led by JPMorgan Chase & Co. in September to settle $3.14 billion in sewer-system debt.
Federal Judge Thomas Bennett in Birmingham set a Dec. 15 deadline on Thursday for a hearing on whether the county is eligible to file for Chapter 9.
The head of the commission that voted for bankruptcy pointed to a $140 million decline in the savings expected from the preliminary deal as the trigger for the filing.
"The terms were set, they were agreed upon, and the final agreement wasn't parallel with those terms," said David Carrington, head of the commission.
Carrington also laid blame at the feet of Governor Robert Bentley and the state legislature for not calling a special session to raise taxes to help the county settle its debt.
For the county's 660,000 and residents and the people of Birmingham, the state's largest city, bankruptcy means a threat to essential jobs and services. More immediately, however, it means sewer system rate hikes and an added burden on poor people already saddled with some of the highest rates in the country.
"It's terrible for the sewer rate payer," said John Young, a receiver appointed by a court to manage the sewer system on behalf of creditors. He said double-digit rate increases were already planned.
Consequences of the filing include the likelihood that it will now be more costly for the county to raise funds in the bond market, at least temporarily.
Thinly-traded sewer bonds sold by the county took a hit in the U.S. municipal market Thursday, More than $1 million of the bonds due in August 2012 traded at 52 basis points over Municipal Market Data's triple-A scale as an investor required a higher yield, an MMD analyst said.
That was a big jump from the last time the issue traded on Aug. 4 when a block of $3.5 million bonds changed hands at seven basis points over MMD's triple-A scale.
"The name is getting people scared," said MMD analyst Domenic Vonella.
The debt crisis could also have a contagion effect on neighboring counties, while rattling the $3.7 trillion U.S. municipal debt market.
Jessie Morris, a notary public waiting in a long lime outside the Jefferson County courthouse in Birmingham on Thursday, said bankruptcy would likely exacerbate the impact of the economic downturn on cash-strapped county residents.
"It's been bad. You are trying to live from paycheck to paycheck and pay your bills. People have lost jobs. This (bankruptcy) is going to make it worse," she told Reuters.
"This (the bankruptcy) is messed up," added longtime resident Angela Abreu, a translator standing on the same line.
"It's sad. Birmingham is just getting pathetic," she said.
Jefferson County's debt 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.
Costs ballooned as interest rates rose, and the county had teetered on the edge of insolvency since its debt was downgraded in 2008. With more than $5 billion in total indebtedness, the Chapter 9 filing on Wednesday surpassed that filed by Orange County California, in 1994.
Larry Langford, a Democrat and former mayor of Birmingham, was sentenced to 15 years in prison last year for his role in corrupt business deals that fueled the multibillion-dollar sewer debt.
Langford presided over the county commission during the height of the bond swaps that led to the run-up of the massive debt.
THE $140 MILLION GAP
JPMorgan, which has said it wanted to avoid bankruptcy, has already paid more than $75 million and waived about $647 million in fees as part of a settlement with the U.S. Securities and Exchange Commission over charges of fraud in connection with Jefferson County's sewer debt.
But David Carrington, who heads the five-member county commission that decided to pull the bankruptcy trigger on Wednesday, said Jefferson County was continuing to pursue claims against JPMorgan and some of its affiliates.
Other leading unsecured creditors of the county include Bayerische Landesbank in Munich.
According to Carrington, one of the leading reasons for the collapse of the preliminary agreement hammered out was the fact that the estimated savings from the deal had shrunk by about $140 million.
"I've continually asked where we stand on the $140 million gap and it was 'Well, don't worry about it. We'll try to find it later.' Well, we don't have later," Carrington said on Thursday.
A final deal to settle the county's debt out of court depended on a special session of the state's Republican-dominated legislature passing a law to allow the county to raise a new tax.
But opposition to that special session appeared strong and Governor Bentley did not call one.
The county's need was dire because, apart from its sewer bond debt, its general fund budget was slashed to $217 million this financial year from $312 million last year and there was a $40 million shortfall, Carrington said.
The county had also agreed to take $10 million out of its reserve fund - pushing it to the limit, he said.
"The special session (of the state legislature) was going to be in September, then it was going to be in October, then it was going to be in November, then it might be December, then it might be January. We can't burn cash like that," Carrington told Reuters.
"So when the sewer agreement's new requirements were placed before us, as well as the general fund crisis it, became time to move on," he said in reference to the bankruptcy decision.
Some analysts have said the action should not be viewed as a harbinger of more bankruptcy filings in the municipal bond market.
Municipal bankruptcies remain rare. The crisis in Jefferson County is more about a revamp of a sewer system that went awry than something systemic to the municipal bond market, those same analysts argue.
What happens in Jefferson County, and in its federal bankruptcy court, could possibly set a precedent for other troubled municipalities after the recent high-profile debt crisis in Pennsylvania's capital of Harrisburg, however.
"I am extremely disappointed," said Young, who disputed Carrington's statement that creditors had changed the terms of the September deal.
"I was here to solve a problem and we had the problem solved. The state supported it. The business community supported it. The creditors supported it. The receiver supported it. The state court supported it," he said.
He laid the blame for the bankruptcy filing squarely on the shoulders of the county commission.
"Politics ruled, logic doesn't," he said, when asked to elaborate on the commission's decision.
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