The county is the largest in the state and includes Birmingham, the states biggest city.
The filing surpasses the previous municipal bankruptcy record set in 1994 by Orange County, Calif., with a $1.7 billion debt. In both cases local governments and those that loaned them money blew up a giant balloon of debt through use of complex derivatives and other speculative bets. As long as paper values continued to rise, the counties could count on low interest rates as the bondholders raked in profits. But when the paper values of these debt instruments began to deflate, as they did throughout the United States several years ago, the counties interest rates shot up and their debts became unpayable.
In 1996 a federal judge ordered Jefferson County to repair and rebuild its sewer system, which was polluting waterways in the region. Over the next several years the county began massively borrowing funds through issuing bonds. Many of these loans were refinanced in 2002-2003 with speculative bets on derivatives and the citys payments to the bondholders became linked to their performance. No other local government has as great reliance on such derivatives as Jefferson County, noted the Birmingham News.
The county has been teetering on the brink of bankruptcy since 2008 when the accelerating financial crisis sunk the countys debt to junk bond status. Interest rates then rose rapidly to as high as 10 percent on the sewer debt, which is now up to $3.2 billion.
To pay the bondholders, county officials have laid off hundreds of workers, and cut work hours and social services. In 2009 the county ordered budget cuts of 33 percent with hundreds of layoffs as well as furloughs and 32-hour workweeks. Last June county officials put 547 workers on administrative leave without pay.
Jefferson County has slashed its budget for this fiscal year by almost $100 million, reported the Wall Street Journal, and is considering $40 million more in budget cuts in December.
County officials have also sought to raise funds through an occupational tax, which has been challenged in the state legislature and in court.
In September, the Jefferson County Commission approved sewer rate increases of more than 8 percent a year and called for bondholders to write off about $1 billion in debt, reported the Washington Post. But the municipal bond owners rejected the deal.
Under bankruptcy, holders of municipal bonds, just like U.S. Treasury bills, are always at the front of the line to be paid, with funds for hospitals, schools, roads, sewers, and workers jobs first in line for cuts.
Jefferson County is the fourth local government to file for municipal bankruptcy so far this year, according to Associated Press. The others include Harrisburg, Pa.,; Central Falls, R.I.; and Boise County, Idaho. A judge rejected Boise Countys filing. Harrisburgs is over a $300 million debt from a trash incinerator. The mayor and state officials have challenged this filing, which a judge will rule on November 23.
Locked-out workers demand jobless pay
North Dakota govt backs sugar bosses
Greek steel strikers take on boss, govt austerity
Locked-out workers picket meat plant in New Zealand
Canada: 3rd miner killed in Vale nickel mines
The dictatorship of capital
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