- Associated Press - Sunday, September 18, 2011

BIRMINGHAM, Ala. — Leaders of Alabama’s largest county on Friday chose to settle with Wall Street over $3.1 billion in debt from a sewer-system overhaul rather than go through with what would have been the largest municipal bankruptcy in U.S. history.

Jefferson County Commissioners voted to endorse the deal, but the state Legislature must take action in a special session to complete the deal, and commissioners said bankruptcy was still possible if that legislation doesn’t go through.

Commissioner Jimmie Stephens, who oversees county finances, said there was no certainty legislators would approve the mix of local tax hikes and budget changes required to make the deal final. “It’s a problem,” he said.

Jefferson County has been trying to avoid filing bankruptcy over the sewer-system debt since 2008. Its problems stem from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

The main effect of a settlement for county residents would be higher monthly bills for sewer service. Jefferson County has about 658,000 residents and is home to both Alabama’s largest city, Birmingham, and its medical and financial centers.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co. includes the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of annual sewer-rate increases.

The Alabama Constitution gives state lawmakers a high level of control over county finances, so the Legislature will have to take several steps to seal the debt deal. Legislators will need to approve formation of a public corporation to take over the sewer system from the county, agree to fund the settlement if the county comes up short and pass legislation allowing the county to reallocate money already earmarked for other uses and to somehow replace lost revenues.

It was not clear on Friday whether there is enough support in the Legislature. But Gov. Robert Bentley, a Republican, welcomed the deal and said he would work with lawmakers and the county so that the necessary laws can be passed.

“It may have been easier for the Commission to file for bankruptcy, but this settlement will result in a much better deal for the ratepayers and citizens of Jefferson County and for the state, with more than a billion dollars in debt reduction for the county,” Mr. Bentley said.

A bankruptcy filing in this case would have overshadowed the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion.

JPMorgan welcomed the agreement. “We are encouraged by the county’s decision to refinance the sewer debt and look forward to working toward a successful resolution in the coming months,” a bank spokesman said.

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 1990s, 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 businessmen were convicted of rigging the transactions that helped put the county in so much trouble.

Those convicted in the graft 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 and McNair both are in federal prison.

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