Bankruptcy now real possibility in one Alabama county

Alabama's largest county has one week to decide whether to file for the largest-ever U.S. municipal bankruptcy or take a deal from Wall Street to settle more than $3 billion in debts linked to a massive sewer project stained by corruption.

Sewer rates will rise one way or the other for the 658,000 residents in Jefferson County, officials say, it's just a matter of how much. The county, where rates already have jumped more than 300 percent in recent years, is Alabama's economic hub and includes the state's largest city, Birmingham.

Officials believe they can stave off any new layoffs either way, and hope they don't have to trim public services if they decide to file for bankruptcy.

County commissioners were set to vote Thursday on bankruptcy, but abruptly canceled the meeting when creditors led by JPMorgan Chase & Co. responded to the county's latest settlement offer. The commission will consider the deal for a week and likely make a decision next Thursday.

Commissioner Jimmie Stephens said the two sides weren't that far apart, and he was hopeful for a settlement.

"We're within striking distance," he said. But "it still falls outside the revenue stream which I deem to be reasonable."

A court-appointed receiver recommended a rate hike of 25 percent, or about a $9 increase on a monthly bill, but Stephens said he hoped to keep the increase much lower.

The county's settlement offer last week would erase more than $1 billion of its debt with the promise of repaying the remaining amount through a combination of modest sewer rate increases and loans.

The issue is important enough for Gov. Robert Bentley's to be involved in the talks.

"We look forward to continuing to work with the Jefferson County Commission and their creditors to pursue an agreement that best serves the citizens of the county and the state," Bentley said in a statement.

Jefferson County has been trying to avoid filing bankruptcy since 2008. The problems resulted from a mix of outdated sewer pipes, the rough economy and a string of elected officials, public employees and businessmen convicted of rigging sweetheart deals.

Sitting on atop a downtown manhole, utility worker Josh Sullivan said years of backroom deals finally caught up with the county.

"All those prior convictions, all those people taking prison terms now will just throw the bills back on the backs of the taxpayers," said Sullivan, who hopes the commission can reach a deal with lenders.

Officials say the total value of the bankruptcy would exceed $4.1 billion once the county's other debts were included, eclipsing the record municipal bankruptcy of $1.7 billion filed by Orange County, Calif., in 1994.

Jefferson County Commissioner Joe Knight said he was unsure whether bankruptcy or a settlement was best.

"Bankruptcy is the great unknown. You go into it and you don't know where you might end up," he said. "A settlement is certainty, but do you give away the farm?"

Municipal bond markets probably wouldn't be affected if Jefferson County files for bankruptcy because many investors have expected it for years and previously factored it into their risk assessments, said Matt Fabian, managing director at research firm Municipal Market Advisors.

The problems began when a federal court in the 1990s forced Jefferson County to upgrade its outdated sewer system to meet federal clean-water standards, and officials used bonds to finance the improvements. Acting at the suggestion of outside advisers in a series of deals that were later shown to be laced with bribes and influence-peddling, the county borrowed money for the project in a complex and risky series of transactions.

Loan payments skyrocketed in 2008 because of increasing interest rates as global credit markets struggled, and the county could no longer afford to repay the money. In the meantime, a string of elected officials, public employees and business people were convicted of rigging the sweetheart deals that helped put the county in dire straits.

Those convicted in the investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford is in federal prison, and McNair's lawyer is now asking President Barack Obama to pardon him for his crimes.

As if the sewer debt wasn't enough, the county has laid off about 550 of its 2,300 workers and scaled back government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget.