BIRMINGHAM, Ala. — A preliminary deal approved Friday with Wall Street bankers would allow Alabama’s most populous county to avoid the embarrassment of filing the largest municipal bankruptcy in U.S. history.
But to help bail their local government out of $3 billion in sewer debt, residents could see tax increases, service reductions and decades of sewer rate increases.
Even though Jefferson County commissioners approved the deal and some creditors also have agreed, bankruptcy still remains possible because the Legislature must hold a special session to approve the final elements of the agreement.
Commissioner Jimmie Stephens, who oversees county finances, said there was no certainty that legislators would approve the mix of local tax increases, budget changes and other legislation that could be required.
“It’s a problem,” he said.
The date for a legislative session won’t be set until the county and creditors work out details of the settlement, but it is likely for this fall, said David Carrington, the commission president.
Years in the making
Jefferson County has been trying since 2008 to avoid filing bankruptcy over $3.1 billion in debt, which resulted from a mix of outdated sewer pipes, the lagging economy and court rulings. At the same time, it faces a separate shortfall of $50 million in its operating budget.
Creditors want all the county’s problems addressed at once to get the government back on stable financial footing. Because of that, Alabama’s Republican-controlled Legislature could be asked to allow for tax increases at the same time as the county increases sewer rates, which commissioners said could rise for 40 years.
The package sounded like a disaster to residents waiting in line at a courthouse to renew their car tags as commissioners met one floor up.
“It’s ridiculous,” said Edward Morgan. “Last week when we had all that rain, all the sewers flooded. What are we paying for?”
Marie Gaines said people on fixed incomes can’t afford to pay more in taxes or sewer bills.
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 sewer rate increases. The commission approved it 4-1, with George Bowman casting the dissenting vote.
“They are balancing this debt on the back of the poor,” Bowman said afterward.
Steps to seal the deal
Alabama’s 1901 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. They will need to approve formation of a public corporation to take over the sewer system, 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 immediately clear if there is enough support in the Capitol, but Gov. Robert Bentley said he would work with lawmakers to pass the necessary laws.
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.
The settlement proposal could serve as a blueprint for other strapped states and counties that run into trouble over their borrowing, said Municipal Market Advisors managing director Matt Fabian.
Sewer rate hikes
The agreement would cap sewer rate increases at 8.2 percent annually for the first three years, followed by yearly increases of as much as 3.25 percent for an indefinite period. In the first year, the median monthly bill would increase by $3.10 to $40.84.
