Jefferson County, namesake of Thomas Jefferson, is one of the eight counties and the most populous county in the U.S. state of Alabama, with its county seat at Birmingham.
Jefferson County filed for bankruptcy on November 9, 2011 supplanting Orange County, California, as the largest & most expensive municipal bankruptcy in the U.S history. The case was filed in the Northern District of Alabama, under Chapter 9 of the Bankruptcy Code citing $4.23 billion in debt. Of that, more than $3 billion was owed to bondholders who lent money to expand and repair the decrepit sewer system starting in 1997.
Jefferson’s bankruptcy is the legacy of a sewer project dogged by political corruption as well as swap agreements that caused its interest rates to spike during the financial crisis of 2008. The interest rate swaps, initiated in 2002 and 2003 were intended to lower interest payments, but had the opposite effect of increasing the county’s indebtedness. When rating of Jefferson County bonds plummeted, the investors dumped the bonds and the county’s interest costs soared. When banks demanded early payoffs of the bonds, the county defaulted. The swaps exposed the county to hundreds of millions of dollars in fees to refinance. In its bankruptcy petition, Jefferson County listed about $202 million in unsecured debt tied to general obligation bonds. The top three unsecured creditors related to the bonds were Bayerische Landesbank, JPMorgan Chase Bank and The Depository Trust Company.
The county was forced to take the matter to court after the elected officials and creditors failed to implement a proposal to cut the sewer debt by about $1 billion. The case is still pending and as of May 2012, Jefferson County has slashed expenses and reduced employment of county government workers by more than 700.
While the size of Jefferson County’s debt is notable, municipal bankruptcies still remain rare when compared to corporate bankruptcies. Jefferson County is the 49th bankruptcy among U.S. cities, counties, villages and towns since 1980.
