Saturday, August 30, 2008

BIRMINGHAM, Ala. | Gov. Bob Riley, a Republican, negotiated with creditors Friday over whether Alabama’s largest county should seek a deal on its $3.2 billion sewer debt or file the largest bankruptcy in U.S. history.

The meeting - held at the Capitol in Montgomery between the governor, a county attorney and creditors - came as the county was due to make an interest payment of some $2 million.

The county had the cash, but Commissioner Jim Carns said officials must decide whether to continue making payments indefinitely or file for bankruptcy since its obligations far outstrip revenues from the sewer system.

Mr. Carns, who did not attend the meeting, said the county must stop the bleeding.

“It’s a matter of whether we can get an agreement to stop it or whether we have to get court protection to stop it,” he said.

Jefferson is Alabama’s most populous county with about 658,000 residents and includes the state’s biggest city, Birmingham.

The county ran into trouble after it was forced by the courts to undertake a huge upgrade of its sewage system to meet federal water standards and stop raw and partially treated waste from being dumped into streams.

Acting at the suggestion of outside advisers, the county borrowed money for the project on the bond market in a complex and risky series of transactions. When the mortgage crisis hit and banks began tightening up on their lending, the interest rates on the debt ballooned.

Running out of options after months of talks with bondholders and insurers, Jefferson County commissioners voted earlier this week to let the governor negotiate directly with creditors. They canceled plans for a public referendum set for Nov. 4 on whether to file for bankruptcy.

A decision not to make the interest payment would place the county in default and put it one step closer to filing bankruptcy over a $3.2 billion bill linked to years of court-ordered sewer improvements and risky credit arrangements.

Such a move would nearly double the previous record for a municipal bankruptcy, set in 1994 when Orange County, Calif., sought protection over $1.64 billion in debts.

Bankruptcy expert Jack F. Williams said layoffs, tax and sewer-rate increases and service reductions all are possible when a city or county seeks Chapter 9 bankruptcy protection.

“It’s generally designed to allow an insolvent municipality to arrange its debts. Typically, it’s bond debt,” said Mr. Williams, a professor at Georgia State University and resident scholar with the American Bankruptcy Institute.

The nearly completed sewer project has been under construction since 1996.

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