Largest Municipal Bankruptcy Ever Prompts Muted Reaction Elsewhere

Last week’s bankruptcy of Jefferson County, Alabama, the state’s largest county, is not provoking a great deal of anxiety in local governments around the nation. Experts say it won’t have much effect on the ability of state and local jurisdictions to borrow. The filing from Jefferson, which is also the home of Birmingham, the state’s most populous city, surpassed the previous record set by Orange County, California, in 1994. How is it possible that a jurisdiction with 650,000 people can go bankrupt without raising more general concerns about local government’s ability to pay its debts? 

One reason is that Jefferson County’s problems aren’t new. The county has been teetering on the brink of bankruptcy for years. While local officials, the county’s creditors and Governor Robert Bentley had been working on a deal for Jefferson to avoid bankruptcy, no one was particularly surprised that the County Commission decided to file for bankruptcy last week. The county actually entered into default two years ago when it failed to make payments to bondholders. “This is not Orange County, where the market sold off strongly for a week or two,” says Matt Fabian, managing director of Municipal Market Advisors. “This is a fairly anticipated and pretty well-compartmentalized problem.” 

The other reason for non-panic is that the origins of Jefferson County’s problem were so peculiar. It’s not that the county had overspent on employees and retirees and was unable to meet its obligations to them. That is a situation many jurisdictions fear.But Jefferson County’s primary problem was an exceptionally costly upgrade of its sewer system that saddled it with $3.1 billion in debt. The sewer upgrade was marred by corruption — prosecutors won more than 20 convictions involving both its construction and its financing. Without making an admission of wrongdoing, JPMorgan Chase also paid more than $700 million to settle a Securities and Exchange Commission pay-to-play case related to the financing of the debt.

According to people who pay close attention to the municipal bond market, investors understand that Jefferson’s unusual circumstances don’t say much about the fiscal well-being of other bond-issuing governments. As the Birmingham News reports , Alabama state government and other Alabama municipalities may have to pay higher interest rates. The effects, though, may not extend beyond the state’s borders. “We don’t believe this is going to have a significant impact on the municipal securities industry or state and local issuers on any kind of systematic basis,” says Leslie Norwood, co-head of the Securities Industry and Financial Markets Association’s Municipal Securities Division. “We really feel this is an isolated situation.”