Alabama county faces bankruptcy decision over debt

Reuters News
Posted: Sep 15, 2011 11:03 AM
Alabama county faces bankruptcy decision over debt

By Melinda Dickinson and Matthew Bigg

BIRMINGHAM Ala./ATLANTA (Reuters) - Alabama's Jefferson County will decide on Friday whether to declare bankruptcy over its $3.14 billion bond debt and there are hints the outline of a deal with creditors may be possible.

The county has three times deferred making a decision over whether to accept a settlement from creditors over the sewer system debt, which escalated in the mid-2000s, or declare what would be the largest municipal bankruptcy in U.S. history.

Each time it has opted, under pressure from Alabama Governor Robert Bentley, to pursue fresh talks, finally nominating County Commission President David Carrington and county Finance Chairman Jimmie Stephens to negotiate directly with creditors who include JPMorgan Chase.

"If we can reach a negotiated settlement with the creditors the future looks bright for Jefferson County. If we can come to a solution, we can finally put this issue to rest and get back to regrowth and development," Commissioner George Bowman said.

"With bankruptcy, we'll be completely dependent on a bankruptcy judge or a bankruptcy court. We would have to defer to whatever the court ruled," Bowman, one of five commissioners, told Reuters.

Bankruptcy could rattle the $3.7 trillion U.S. municipal debt market, though markets have known since 2008 the county was teetering on the edge of a bankruptcy that would surpass the one declared by Orange County, California, in 1994.

It would cast a stain on the state's fiscal record, which partly explains the governor's close involvement.

It also could drive business from Birmingham, the largest city in the state, if a post-bankruptcy deal led to a steep rise in sewer rates that are already among the highest in the nation or to a rise in local taxes, said commissioners.

"The best option is to get all of this resolved (through a deal)," said Representative Paul DeMarco, a Republican member of the county's delegation to the state legislature.

"If they end up having to file for bankruptcy it is because they are forced to do that because the terms of any potential settlement were disadvantageous to the citizens of the county," he told Reuters.


The fact that the decision has been repeatedly postponed could in itself make bankruptcy less likely, said Andreas Rauterkus, a finance professor at the University of Alabama at Birmingham who has watched the crisis closely.

"They are going to find a way to probably resolve it ... Both sides have invested so much time and efforts into this that at this point it wouldn't make any sense to just abandon it," he said.

Last month, the commission rejected a settlement offer from creditors, in part because of insufficient protection for county residents on low incomes, who could face steep rate increases under the deal.

But key sticking points remain to reaching a settlement:

* Creditors said last month that pending litigation over the debt must cease, a demand the county rejects in part because it is a defendant in some civil cases.

Some 22 people have been convicted on criminal charges for debt-related corruption.

* Commissioners say they will not accept annual rate rises over 10 percent. County residents reacted angrily in June when court-appointed water system receiver John Young imposed a 25 percent rate increase.

He delayed its implementation and Carrington said this week creditors have given verbal consent to the county's plan for annual increases not exceeding 8 percent.

* Creditors want the sewer system's assets transferred to a public company, called a Governmental Utilities Services Corporation (GUSC). Commissioners resist that idea.

* There is no guarantee that the state legislature will agree to form a GUSC or to allow the reintroduction of a county tax, a key component of any deal relating to the county's separate general fund debt.

"If we agree to a negotiated settlement with the creditors, everything shifts to the legislature, to see if the state concurs with the county's desire to form a public corporation to manage the sewer system," said Commissioner Joe Knight.

(Editing by Jane Sutton and Theodore d'Afflisio)