Jefferson County Commission president David Carrington looks over the Chapter 9 bankruptcy filing in the doorway of his office at the Jefferson County Courthouse. Jefferson County announced it will file bankruptcy after the Jefferson County Commission met for several hours in a closed door session Wednesday November 9, 2011. It will be the largest municipal bankruptcy in U.S. history. BIRMINGHAM, Alabama -- Jefferson County, facing $4.23 billion in debt and running short of cash, gave up Wednesday on reaching a deal with its creditors and immediately filed the largest government bankruptcy in U.S. history.
The 4-1 vote to seek protection under Chapter 9 of the U.S. Bankruptcy Code came on the 365th day since the current commission took office. That year was dominated by sometimes frantic negotiations with Wall Street banks that over the past decade loaned and refinanced more debt than the county had the ability to repay.
Supporting the move were Commission President David Carrington and commissioners Sandra Little Brown, Joe Knight and Jimmie Stephens. Commissioner George Bowman voted no.
"Bankruptcy is sometimes a measure of last resort," Knight said. "In my mind, we have reached that last resort."
At 4:29 p.m., moments after the vote, county attorneys filed the petition in U.S. Bankruptcy Court for the Northern District of Alabama. Chief Bankruptcy Judge Thomas B. Bennett will handle the case and set a hearing for 10 a.m. today.
Late Wednesday, county attorneys filed a raft of documents, listing nearly 200 pages of businesses and individuals to whom Jefferson County owes money. Those pages carried the names of more than 5,000 creditors. The largest creditor is JPMorgan Chase & Co., which owns about $1 billion of the county's $3.14 billion debt for sewer construction.
Besides the sewer debt, the county owes $814 million in school-construction debt and another $305 million in general-obligation warrants.
The bankruptcy decision came after commissioners spent about 11 hours over two days huddled behind closed doors on the fourth floor of the Jefferson County Courthouse in Birmingham with their lawyers discussing legal options, including an ongoing attempt to reach a settlement with sewer-debt creditors.
By Wednesday afternoon, they gave up on the settlement, emerged from their closed session and moved down to the second-floor Commission Chamber to vote in favor of bankruptcy -- something Gov. Robert Bentley and many of Birmingham's key business leaders had urged them to avoid.
In doing so, Jefferson County's collapse earned a place in the history books, far eclipsing the previous biggest municipal bankruptcy -- a $1.7 billion filing by Orange County, California, in 1994 -- even when inflation is factored in.
Rebuke from Bentley
Jefferson County's action brought sharp criticism.
Bentley was interviewing candidates for state school superintendent when he got the news.
"I am extremely disappointed in the action that was taken by the commission today," the governor said. "We feel everything was put into place to save the county from bankruptcy and to help the ratepayers and keep this embarrassing situation from occurring in the state of Alabama.
"What we're going to do now is to try to control the damage to our state."
WHAT IS CHAPTER 9?
The purpose of Chapter 9 bankruptcy is to provide a financially distressed municipality protection from its creditors while it develops a plan for adjusting its debts. The next steps in that legal process include:
• Notice of the filing is advertised in the federal register and a newspaper.
• Creditors file any objections, and the court holds hearings.
• The county develops its repayment plan.
• Creditors form a committee and make suggestions.
• The bankruptcy judge rules on the plan.
Source: U.S. Bankruptcy CourtHe said he anticipates that Jefferson County's bankruptcy will drive up borrowing costs for governments across the state.
John Young Jr., the court-appointed receiver who has been running the county sewer system since September 2010, called the commissioners' decision a "catastrophic mistake."
"This decision by the Jefferson County Commission has devastating consequences for wastewater customers, citizens of Jefferson County and the state as a whole," Young said. "All of those involved except the commissioners wanted the settlement and were working to make a settlement a reality. This decision will cost wastewater customers billions of dollars."
Young, who has been paid more than $1 million over the past 14 months to run the system, contended that "the state of Alabama desperately wanted a settlement, the creditors wanted a settlement, the business community wanted a settlement, and the commissioners just turned their backs and walked away.
"This utterly irresponsible act makes the dark cloud hanging over Jefferson County even darker."
Young said a proposed settlement agreement, which contained about $1 billion in concessions from sewer-debt creditors, is no longer on the table.
Bowman, the only member of the commission to oppose bankruptcy, said he thought the county should have kept working toward a settlement with creditors.
Some, though, supported the county's move.
Kenneth Klee, the Los Angeles-based bankruptcy law expert hired to advise the county, said commissioners had run out of alternatives.
"The county had reached a point in its negotiations with the creditors where it believed that good faith negotiations had come to impasse and no further negotiations to reach a central result were possible, and the time had come to take a step to go into Chapter 9 to resolve its differences," Klee said. "The county has no option. It has to look out for the best interests of its citizens and a consensual resolution was not possible."
Robert Brooks, a professor of financial management at the University of Alabama, called bankruptcy the county's best option.
"One of the problems here is that the creditors are some of these large investment banks that appear culpable in Jefferson County's financial woes," he said. "No longer is Jefferson County looking across the table from people they rightfully should not trust."
State Sen. Slade Blackwell, R-Mountain Brook, said Jefferson County's bankruptcy will have negative ramifications on the county and state for decades to come.
"Filing the largest municipal bankruptcy in U.S. history will undoubtedly make it increasingly difficult for Jefferson County and the state of Alabama to grow and expand in economic development," he said. "Bankruptcy will not wipe away the county's debt and will only escalate spending by the county on legal expenses."
More than debt
While Jefferson County's debt was crippling, in the end it was as much the county's regular budget that pushed commissioners to file for bankruptcy.
The state Supreme Court earlier this year ruled that an occupational tax enacted by the Alabama Legislature was flawed and struck that tax down, draining about $66 million from the county's budget. The county already had cut $95 million -- or 30 percent -- from the current year's general fund budget, and was faced with making another $40 million cut by Dec. 1.
[Click here to download this timeline chart as a PDF.]The Jefferson County delegation to the Legislature could not reach any agreement on how to fill the void in the county's budget, and also could not reach agreement on supporting legislative action that would have been needed to enact a settlement with the sewer-debt creditors. Alabama's constitution limits county governments to only those powers they are specifically granted by the Legislature, and the local delegation's lack of consensus on potential solutions left commissioners with few options.
Lawmakers came within one vote earlier this year of permitting the county to levy a new, limited occupational tax, but state Sen. Scott Beason, R-Gardendale, objected. That effectively killed the proposal, which required unanimous support of the local delegation.
Bentley had been working with legislative leaders as recently as Tuesday to help find a solution for Jefferson County's crisis. On Wednesday he said he would drop plans to call a special session to help the county.
"I believe you pay your debts," he said. "That's what I told them and I still believe that."
Jefferson County's financial affairs began to melt down publicly in February 2008, when the nationwide credit crunch cause its debt obligations to skyrocket.
Since then, negotiations with creditors have failed to resolve the crisis.
In a Bankruptcy Court filing late Wednesday, county officials contended they had worked tirelessly for 3½ years to overcome "unprecedented financial obstacles without seeking bankruptcy protection."
However, the document said, "... the county needs to resolve its outstanding liabilities comprehensively and in a single forum. Accordingly, the county has filed the instant case under Chapter 9 of the Bankruptcy Code as a last resort and in a good faith effort to adjust its debts for the benefit of its creditors and citizens."
Carrington said the Chapter 9 filing would not interfere with the county's delivery of essential services to its citizens or payment to employees and vendors.
He added that the county is working with advisers to prepare a Chapter 9 plan to adjust the county's debt and to emerge from Chapter 9 as soon as it can.
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