By Melinda Dickinson
BIRMINGHAM, Alabama (Reuters) - Politically unpopular rate hikes could cover the debt service on the $3.14 billion of sewer-system debt that drove Alabama's Jefferson County last year to file the biggest municipal bankruptcy in U.S. history, the system's receiver said on Wednesday.
John Young, the receiver who was stripped of his executive authority in January by a bankruptcy judge, testified during a court hearing in Birmingham that rates paid by the county sewer system's customers were below the U.S. average.
"Over time, you could certainly service the debt with rate increases," Young said, adding in response to a lawyer's question that "it happens everywhere every day, and it will happen here. This is happening all over the country, and rates have always been raised to cover debt service."
Jefferson County, which is Alabama's most populous county, filed for the bankruptcy on November 9 after bargaining for years with creditors to reduce its sewer debt. Four former county commissioners were found guilty in a scandal tied to the sewer financing.
Young, who championed user-fee increases of as much as 25 percent to fund principal and interest payments during the 14 months he ran the sewer system, still holds the position of receiver. But operating power reverted to the county in January.
A utility company executive with decades of experience, Young spoke during the first of three scheduled days of hearings on a dispute between creditors and the cash-starved county over how much of the system's roughly $100 million of annual net revenues should go to debt holders.
America's $3.7 trillion municipal bond market is keeping a close eye on the dispute since it threatens to weaken safeguards for owners of so-called enterprise debt, whose payments come from dedicated revenues usually unaffected by bankruptcies.
Jefferson County, which filed for bankruptcy last November after a tentative settlement unwound, reduced payments to creditors by $9 million in early 2012 before striking a temporary deal with creditors in February.
Creditors are also still fighting the county's eligibility to file a Chapter 9 bankruptcy. This week, creditors won permission to appeal a March ruling approving the county's bankruptcy status.
On Monday in Birmingham, U.S. District Court Judge Inge Johnson issued a three-sentence order giving Bank of New York Mellon creditors permission to appeal the eligibility status of the county's bankruptcy.
Creditors had argued the county was not entitled to bankruptcy status since its debt, including the sewer debt at the heart of its crisis, was composed mainly of warrants and included no bonds, as required by Alabama law.
(Additional reporting by Verna Gates in Birmingham; Writing and additional reporting by Michael Connor in Miami; Editing by Jan Paschal)