BRADENTON, Fla. — Jefferson County, Ala., commissioners Wednesday voted to file the largest municipal bankruptcy in U.S. history, saying they could not come to terms with creditors over restructuring $3.14 billion of defaulted sewer debt.
On a 4 to 1 vote, commissioners decided to proceed with a Chapter 9 filing.
The decision was rendered after commissioners met over two days with attorneys and discussed last ditch settlement terms with creditors.
The county filed the petition for bankruptcy at the federal courthouse in Birmingham, the county seat.
The lone dissenting vote against bankruptcy came from Commissioner George Bowman who previously voted against settling with creditors because restructuring the sewer debt would have required raising sewer rates. He wanted to propose a counteroffer that would have creditors take up to a 50% haircut.
Commissioners in mid-September approved a term sheet outlining broad settlement terms in which creditors agreed to take a haircut of $1.09 billion in return for a debt refinancing that would convert $2.05 billion of sewer warrants into 40-year debt. The deal also relied on the Legislature creating a special district to take over the sewer system and providing a moral obligation for repayment of about $1 billion.
The motion to file for bankruptcy was made by Commissioner Jimmie Stephens, who heads up the finance committee. He said terms of a final settlement forwarded by creditors in the past week were not acceptable, and other board members echoed those sentiments.
“I am disappointed by the commission’s decision… as bankruptcy will negatively impact not only the Birmingham region, but also the entire state,” Gov. Robert Bentley said in a statement moments after the County Commission voted. “My administration has worked closely with the Jefferson County Commission, the sewer creditors and legislators to work toward a settlement that is in the best interests of the Jefferson County residents and rate payers.”
Bentley said the settlement the county rejected would have reduced the amount of sewer debt to be repaid and significantly reduced proposed sewer rate increases.
“By filing for bankruptcy, the county commission now relinquishes control of its affairs into the hands of a federal bankruptcy judge,” Bentley said.
JPMorgan, the county’s largest creditor, had agreed to take the biggest haircut on the restructuring deal — $750 million. The firm also agreed to waive $9 million in swap termination fees related to $120 million of troubled variable-rate general obligation warrants. That debt is being held by liquidity providers, and not related to the sewer warrants.
“JPMorgan worked very hard with the county and other creditors to avoid a bankruptcy filing,” bank spokesman, Justin Perras, said in a statement. “We offered very substantial financial concessions to make the deal happen while keeping sewer rates within the parameters proposed by the county. While we’re disappointed by the county’s decision to file, we will continue to work toward a fair and reasonable solution for the county and all creditor constituents involved.”
Alabama Attorney General Luther Strange had already intervened in a separate court case involving a proposal by the county’s sewer system receiver that would have required higher sewer rate increases than were needed to support the settlement with creditors.
“The job of the Attorney General’s Office is to represent the sewer system ratepayers, and we will diligently review any rate structure proposed during the bankruptcy proceedings to ensure that rates are just and reasonable,” Strange said.
The county, under a previous commission, threatened to file for bankruptcy in early 2008 after the variable- and auction-rate sewer debt, and related swaps, collapsed in the wake of the subprime market meltdown.
Nearly all of the county’s fixed-rate sewer warrrants were refunded in 2002 and 2003 into variable- and auction-rate mode to avoid large increases in sewer rates and provide capital for sewer system improvements. Most of the work was required because of a consent agreement due to violations of the Clean Water Act.
Since the current commission took office earlier this year, settlement talks resumed in earnest. But the board also lost a major revenue source for its general fund when courts struck down a legislatively authorized occupational tax.
Local lawmakers refused to pass a bill that would have replaced the revenue. The same local delegation refused to come to agreement in the past two months over whether they would even assist the county with measures necessary to see the sewer debt restructured.
The Birmingham City Council on Nov. 1 passed a resolution urging the county to file for bankruptcy. They also hired a retired federal judge to determine if legal action could be taken to preview what they called “unjust” sewer rate increases.
Bentley said Jefferson County’s sewer debt crisis has been an impediment to economic growth in the state, “and the bankruptcy filing will now be an even greater challenge to overcome.”
