published Saturday, August 13th, 2011

Alabama County asks Wall Street for further talks

BIRMINGHAM, Ala. — Leaders of Alabama’s most populous county voted unanimously Friday to reject a settlement with Wall Street creditors to pay off more than $3.1 billion in debt and bought more time to avoid what would be the largest municipal bankruptcy ever filed.

The five members of the Jefferson County Commission also unanimously approved a resolution to give the commission president and finance chairman until Sept. 16 to personally negotiate a deal.

The county has been trying to avoid filing bankruptcy over more than $3.1 billion in sewer system debt for three years. Its problems stem from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

State officials and a court-appointed receiver have been closely involved in the negotiations. Republican Gov. Robert Bentley’s chief of staff, David Perry, attended Friday’s meeting.

Perry said a Chapter 9 bankruptcy proceeding is still a possibility but “a general framework for a deal is in place.”

Perry said Bentley and legislative leaders would get personally involved to make sure any needed legislation passes if county officials can work out a deal.

“The county and creditors do not have a definitive deal in place yet, but they have a conceptual framework that keeps sewer rate increases at a minimum and resolves the problem once and for all for the county,” the governor said in a statement.

Commissioner Jimmie Stephens, who oversee the county’s finances, said members think they could get a better deal in bankruptcy court than was offered by lenders.

“That’s the reason we didn’t accept the creditors’ offer,” he said.

The main problem is some $3.14 billion in sewer debt. The total value of the bankruptcy would exceed $4.1 billion once the county’s debts for schools and other projects are included, officials said.

Commissioners sharply criticized the settlement proposal by Wall Street, which would have resulted in rate increases of almost 25 percent within 18 months and additional, single-digit rate hikes for as long as 40 years. Creditors would have forgiven more than $1 billion in debt and the county would have refinanced $2.3 billion, which would be used to pay off old debts, create a $233 million reserve and cover more than $23 million in issuance costs.

The settlement also would have resulted in dismissal of litigation including the county’s lawsuit against JPMorgan over deals that helped lead to the debt. Commissioners said all those cases should go forward and criminal investigations into the debacle should continue.

“There are still bad people out there,” Commissioner Sandra Little Brown said.

State lawmakers would have to approve legislation to put key parts of any agreement in place and commissioners said the governor had asked for additional time to work with lawmakers building support. But Stephens said he is skeptical, particularly because the Legislature this year failed to approve bills needed to fix other problems in the county’s operating budget.

Jefferson County has about 658,000 residents and is home to both Alabama’s largest city, Birmingham, and its medical and financial centers. A bankruptcy filing by Jefferson County would far exceed the current record for a municipal bankruptcy, set 17 years ago by Orange County, Calif.

Jefferson County resident David Roebuck, 25, said the financial debacle is disappointing, and he fears it will tarnish the area’s reputation for years.

“It’s embarrassing,” Roebuck said. “How are you going to attract new business or industry if the county isn’t being run very well?”

The county has been trying to avoid filing bankruptcy since 2008. It offered JPMorgan Chase & Co. and other creditors a deal that would have wiped out more than $1 billion of the sewer and led to sewer rate increases.

A court-appointed official last month recommended a 25 percent rate hike for sewer customers, whose average residential bill would increase by more than $9 a month to $46.88, calling it a necessary step toward financial viability, but it’s unclear what might happen to rates, county services and its workforce should leaders opt for bankruptcy.

Jefferson County financial woes result from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the ’90s, and officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling.

Loan payments rose quickly because of increasing interest rates as global credit markets struggled, and the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

The sewer debt isn’t Jefferson County’s only problem, though. It already has laid off about 550 of its 2,300 workers and reduced government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. The county has closed satellite offices and reduced hours, and long benches now line a hall in the main courthouse where residents often have to wait hours for the simplest of transactions, like getting a new car tag.

Jefferson County’s bankruptcy filing would be nearly twice as large as the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion. Jefferson County officials have been consulting with one of the lawyers who worked on the Orange County bankruptcy.

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