Jefferson County made dubious history on Wednesday afternoon, as officials filed papers to declare the largest municipal bankruptcy ever in the United States.
The Jefferson County Commission voted 4-1 to petition for Chapter 9 bankruptcy, as a result of more than $4 billion in debt, with more than $3 billion of that resulting from renovations to the sewer system and subsequent financial improprieties. Commissioner George Bowman cast the lone dissenting vote.
Papers were filed with U.S. Bankruptcy Court minutes after the vote, which had the immediate effect of staying all collection actions from creditors.
A list of the top 20 creditors included mostly Wall Street investment banks, which hold the vast majority of the bonds issued for the sewer system upgrade that was mandated by the Environmental Protection Agency in the 1990s. The rest of the list generally includes trade debt — expenses incurred during normal day-to-day business.
The effect on communities in Jefferson County remains to be seen, but Fultondale mayor Jim Lowery thinks that residents will see severe cutbacks in county services, which will force cities to make up at least part of the difference.
“It’s devastating. It’s going to have an impact on every community in the county, incorporated or not,” Lowery said. “The county is already struggling to pave roads and cut grass. We’re in for a lot more of the same kind of cutbacks.”
Lowery fears that cutbacks will lead to layoffs of county personnel, which will put a dent in the local economy.
“They won’t be there to provide the services we already paid for, but they also won’t be working, which means they won’t be going shopping as much for Christmas,” he said. “That’ll have a real negative effect on our economy.”
Gardendale mayor Othell Phillips said he doesn’t know yet what direct effect the filing will have on his city.
“We haven’t had time to assess the situation yet,” Phillips said. “We don’t have all the details that the commissioners had at their disposal. I’m sure they made the decision that they thought was correct. But we’re kind of in the dark right now — we weren’t expecting this just yet.”
The commission had attempted to negotiate with the largest creditors over the past few weeks, and had an agreement in hand in mid-September. But creditors changed their terms over the last few days in a way that would not avoid a very large rate increase for some sewer users, and that was more than Commission President David Carrington could bear. District 4 Commissioner Joe Knight, who represents north Jefferson County, agreed.
“I think the creditors and the receiver were starting to push us around, thinking we would take whatever they would throw at us,” Knight said. “They made some concessions, but I think they thought they had us over a barrel and we’d acquiesce.”
Knight said proposed sewer rate increases had “too many contingencies to get this resolved. I thought we were just kicking the can down the road.”
U.S. Bankruptcy Court Judge Thomas B. Bennett will hold a hearing Dec. 15-16 to determine if the county is eligible to seek Chapter 9 protection. Major bondholders such as investment bank JPMorgan Chase are expected to oppose the petition, hoping to resolve the matter through lawsuits instead.
Additionally, attorneys for the county expect that John Young, the receiver for the sewer system appointed by state courts, will oppose any attempts to remove the system from his supervision on the grounds of the 10th Amendment to the U.S. Constitution, which addresses states’ rights.
If approved, this bankruptcy eclipses the previous largest Chapter 9 filing by Orange County, Calif., in 1994.