July 28 (Bloomberg) -- Jefferson County, Alabama, extended negotiations for a week about a possible settlement that would avert the largest municipal bankruptcy in U.S. history.
Talks among the governor, the system’s court-appointed receiver and creditors owed more than $3.1 billion on sewer-system bonds will be extended until Aug. 4, according to a news release from David Carrington, president of the County Commission.
“We’ve waited three years,” Commissioner Jimmie Stephens said in a news conference in Birmingham. “I’m willing to give them three, four, five, six days.”
The threat of bankruptcy has loomed over Jefferson County, home to Birmingham, Alabama’s biggest city, for three years as officials sought to spare residents from the ballooning sewer rates that would be needed to finance its debt.
The commission canceled a meeting that been scheduled today to consider a filing, according to the news release.
Creditors offered to reduce the county’s debt by about one third of the total, Commissioner Sandra Little Brown told reporters. Little Brown, who this week said the chances of bankruptcy were 80 percent, said Carrington briefed her and other commissioners on the plan, which they hadn’t seen.
Money for Water
The plan would require an 8 percent increase in sewer bills that would be in place longer than the three years the county had offered, she said. She didn’t say how long the elevated rates might last.
Stephens said such rate increases are beyond what the county deems reasonable.
David Perry, Alabama’s finance director, said the plan didn’t tell county officials how much they should raise residents’ bills.
“The only condition is that the rate increases would have to be sufficient to service the new debt level,” he said in a telephone interview. The county also would be allowed to pay the debt with other revenue, such as from sales taxes, he said.
The counteroffer envisions a significant state role and would require a special legislative session, Perry said. Lawmakers might need to create an independent sewer authority and pledge the state’s “moral obligation” to back the debt, he said.
A $2 billion bond issue by a new authority at 8 percent interest would require a total 27.2 percent revenue increase over the first three years and 3 percent annual increases starting in 2015 over the 32-year life of the debt, according to a summary prepared by Citigroup Inc. for the receiver’s interim report issued last month.
Little Brown said she now put the odds of bankruptcy at 85 percent.
“I think we’re really about where we were before this happened,” she said. “We’re just going to give the governor some time.”
Governor Robert Bentley said the week-long pause would allow him to perform a thorough review of the plan.
“I believe this offer deserves serious consideration,” he said in a statement.
The crisis erupted in 2008 when investors dumped the county’s floating-rate bonds, which were used to refinance the fixed-rate sewer debt, after companies that insured them lost their top credit ratings because of investments in subprime mortgages. Banks providing backstop guarantees on the debt required the bonds to be paid off early, a step Jefferson County couldn’t afford to make.
A bankruptcy filing would leave banks such as JPMorgan Chase & Co., individual investors and the bond insurers Financial Guaranty Insurance Co. and Syncora Guarantee Inc. facing hundreds of millions of dollars in losses. It may also burden county residents with higher taxes or sewer bills, which have risen more than fourfold since 1997 as the cost of the sewer system soared.
Michael Corbally, a spokesman for Syncora, declined to comment on the county’s situation in an e-mail. Calls to JPMorgan for comment today weren’t returned.
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