Alabama city's woes predated coronavirus and Chapter 9
Fairfield, Alabama, has become the first city to file for bankruptcy since the onslaught of COVID-19, though its years of fiscal distress predate the pandemic.
The 110-year-old city near Birmingham filed a Chapter 9 petition in the U.S. Bankruptcy Court for the Northern District of Alabama in Birmingham on Tuesday.
Fairfield has nearly $19 million in outstanding long-term debt plus other bills it has struggled to pay since losing a Walmart Supercenter and the sales tax collections that it brought to the city's coffers in 2016.
"Fairfield had a lot of baggage," Matt Fabian, a partner at Municipal Market Analytics told The Bond Buyer. "I think that's the base case that we see for at least a few small cities and governments that either default or are filing for bankruptcy."
While Fabian said the coronavirus pandemic may have pressured Fairfield's expenses even more, the city has battled with bondholders and a bond insurer for years.
U.S. Bank, the trustee for the city's 2012 warrants and paying agent for the 2004 warrants, is owed $18 million, according to the city's list of top 20 unsecured creditors filed with the bankruptcy court.
Ambac Assurance Corp., which insures the 2004 warrants, is owed $900,000.
Fairfield said in court filings that it's not paying debts when they become due and it is insolvent. The city also said it has more than 200 creditors and owes between $1 million and $10 million.
Fairfield officials didn't immediately respond to requests for comments about the bankruptcy filing or if the city intends to seek relief from its long-term debt.
Mayor Eddie Penny told AL.com that the city had financial problems before the pandemic began, but that the outbreak has taken a toll on the local economy.
“We’ve had several businesses close,” Penny told the publication, adding that the city has filed for bankruptcy because expenses have "greatly" exceeded revenues. “Basically, we’re just seeking a fresh start.”
Fairfield is a "poster child" for small distressed cities and local governments with debt and other unpaid bills that will be forced into bankruptcy because the costs are too large and the pain is too widespread, Fabian said.
While the coronavirus may not have directly triggered Fairfield's bankruptcy, he said the pandemic may cause some defaults and Chapter 9 filings in the future.
Since 2016, Fairfield has been embroiled in a lawsuit filed by the Birmingham-Jefferson County Transit Authority in an attempt to collect about $100,000 owed by the city, said material event notices posted on the Municipal Securities Rulemaking Board’s EMMA filing system.
Fairfield in 2018 filed a cross complaint against the county tax collector in an attempt to prevent the agency from sending ad valorem tax collections to the Transit Authority as partial payment for transit services, according to AL.com.
In a notice on EMMA in 2019, U.S. Bank said it was monitoring the litigation because both the 2004 and 2012 subordinate warrants are secured by liens on the same non-educational ad valorem tax collections. The 2012 debt is also secured by special sales tax collections.
While Fairfield has paid debt service on the 2012 warrants and allowed AMBAC to make payments on the 2004 debt, the city has been in technical default for failure to provide audits. The last audit posted on EMMA was for fiscal 2017.
Fairfield is in Jefferson County, which went through its own landmark bankruptcy from 2011 to 2013. The city is home to about 11,000 residents, and to Miles College, a historically black liberal arts institution.
The City Council's resolution authorizing filing of the Chapter 9 petition states that the city plans to honor all pre-petition accrued obligations to city employees for wages and salaries, including earned vacation, severance and sick pay leave, and contributions to pension and benefit plans.
The resolution also states that the city intends to honor pre- and post-petition continuing obligations to trade vendors providing goods and services in the ordinary course of business.