Jefferson County in Alabama faces bankruptcy

Jefferson County is at the heart of Alabama and contains the major city of Birmingham

Leaders of the largest county in the US state of Alabama have voted to file for a $4.1bn (£2.6bn) bankruptcy, the costliest US municipal failure ever.

Jefferson County has been struggling to avoid bankruptcy since 2008, but recent talks on a deal to restructure its crippling debt broke down.

The county sunk into debt after a costly upgrade of its sewer system.

Jefferson County has about 658,000 residents and is home to Alabama's largest city, Birmingham.

The bankruptcy was approved by the Jefferson County Commission by a 4-1 vote.

Announcing the vote result, Commissioner Jimmie Stephens said filing for bankruptcy would not radically change the situation in the county.

"Jefferson County has, in effect, been in bankruptcy for three years," he told the Associated Press.

Bond problems

In September, a deal with the county's creditors, including JPMorgan Chase, saw lenders agree to forgive about $1bn in debt, with the county refinancing another $2bn, and a series of sewer rate increases.

However, the negotiations ended some $140m short as terms of the deal shifted, increasing the repayment amount from $2.05bn to $2.19bn.

Jefferson's mounting debt issues were brought on by a combination of increasing interest rates on bonds, turbulency in the derivatives market and corruption among local government officials.

At least 21 people, including four former county commissioners, have been convicted or pleaded guilty to corruption-related charges in connection with the sewer's construction and bond financing, according to Bloomberg News.

Jefferson's local government has suffered as a result - police officials cannot afford to respond to traffic accidents - all while sewer and water bills increased, reports say.

"I get tired of them dumping on the little people," Deb Passmore, a former Laundromat owner told the New York Times in July.

She closed her business after her sewer and water bills reached $500 a month.

Orange County precedent

Earlier in 2011, the Alabama Supreme Court declared a separate county tax unconstitutional, limiting Jefferson's ability to raise further income to pay off its debts.

The county's bankruptcy deal would be significantly larger than the current biggest filing, that of Orange County, California, which filed in 1994 with debts of $1.7bn.

Municipal bankruptcies are rare, but are becoming more common as the US faces continuing economic problems.

Pennsylvania's capital city, Harrisburg, filed for bankruptcy in October 2011 in the face $300m in debt arising from a costly trash incinerator program. Soon afterwards the state passed a law taking control of the city's finances.