If you have been following the flow of news in municipal bond land, you know all about Meredith Whitney’s grandiose calls for waves and waves of municipal bankruptcy fears. The good news is that she appears to have overstepped the line and perhaps been way too aggressive on her time frame. The bad news is that her warning was an alarm that showed many of the problems in municipal finances around the country. Now we do have a bankruptcy filing from Jefferson County, Alabama, and it is the largest municipality bankruptcy in U.S. history.
At its meeting Wednesday afternoon, the Jefferson County Commission voted to file for Chapter 9 bankruptcy protection in a 4-to-1 vote. The goal is to restructure more than $4 billion of County debt. The restructuring is expected to include some $3.14 billion in debt owed by the county’s sewer system. Another issue is that the county is already working with advisors to adjust its debts and to emerge from Chapter 9 as soon as possible. Another issues is that the exit from Chapter 9 would be facilitated by legislation by the Alabama State Legislature to address the County’s General Fund shortfall.
Chapter 9 of the Bankruptcy Code was formed to protect governments from the interruption of their essential governmental services while working to develop a restructuring plan.
This is an outcome that the county tried to avoid since 2008. J.P. Morgan Chase & Co. (NYSE: JPM) is listed as one of the largest creditors but the bank already noted that it would not have a significant impact from the filing.
This only adds uncertainty to the $3.7 trillion municipal bond market in the U.S. and it comes roughly a month after Harrisburg, Pennsylvania filed for bankruptcy.
This was not the first casualty in municipal bankruptcies, and it very likely won’t be anywhere close to the last.
JON C. OGG