Alabama county's cash crisis overshadows debt woes

BIRMINGHAM (Reuters) - A budget crisis is forcing Alabama's Jefferson County to push negotiations over its multibillion dollar debt onto the back burner even though the mounting payments due could drag the county into bankruptcy.

If Jefferson County goes bust it will be the largest municipal bankruptcy in U.S. history, but the pressure of coping with sharply falling revenue has reduced the priority of talks on how to reschedule the debt, county commissioners said.

In the latest sign of financial turmoil, Jefferson County announced on Wednesday it would put roughly 1,000 employees, out of 3,200 total, on administrative leave without pay by August 1 in a bid to save money.

"Our immediate crisis is being able to provide services and keep people employed. That's the No. 1 crisis here in this community. The sewer crisis has taken a back seat," said county commissioner Sheila Smoot.

"Is there pressure (to resolve the debt)? No, not right now, but we are conscious that the debt exists," she said.

Alabama's debt problems and its funding crisis overlap. The county amassed the debt earlier this decade through a series of costly bond swaps to finance repairs to its sewer system.

The problem spiraled in February 2008 when ratings agencies downgraded its bond insurers, sparking months of talks on repayment and several forbearance agreements with creditors.

The debt now stands at $3.4 billion, said commissioner William Bell, though $4 billion is a more likely figure given escalating fees and swap termination payments, said Melissa Woodley, finance professor at Birmingham's Samford University.

The U.S. recession caused a drop in county revenue that was compounded in May when the state legislature did not reinstate a county occupational tax that would have raised $78 million for the $240 million general fund used for recurring spending.

In theory, the county's cash shortfall could even prevent the department that runs the sewer system from collecting revenue needed to finance the sewer debt, said Bell.

"We are negotiating with the creditors ... but our primary focus at this time is on the general fund crisis because if the county goes down, we won't have the ability to negotiate or even collect other revenues," he said.

DEEP IMPACT

In one sign of the diminished attention paid to debt negotiations, a forbearance agreement to forestall interest payments lapsed on July 15 and has not been renewed.

The county also missed a $46 million repayment on the debt principal on July 9 with no consequences, in part because under U.S. law, creditors cannot force a municipality into bankruptcy, lawyers familiar with the county's finances said.

Creditors, including JPMorgan Chase & Co (JPM.N), face a dilemma: as talks drag on they must calculate the value of the money they could recoup in a bankruptcy or negotiated settlement against the time their investment is tied up.

"We don't want to file for voluntary bankruptcy because it will create a contagion effect for the state. But is stringing the creditors along for two years favorable to the state?" said Woodley, articulating a question she said the county faced.

In its effort to save money, Jefferson County took the drastic step of ordering the county sheriff's department to cut its 2008 budget from $61 million to $40 million, said county sheriff Mike Hale, who went to court to get the order overturned.

Hale won the fight to avoid cutting 155 of 575 deputy sheriffs and all of his 132 civilian employees, he said.

Other county services have not been so fortunate. The Lovelady Center, which provides a halfway house in Birmingham for women leaving prison, has seen its funding from the county cut entirely, according to director Brenda Spahn, whose center has several revenue streams.

"People like us take a big hit, and what is so bad about it is that the women who we take care of will be out on the street and then the county will have to look after them," Spahn said.

(Additional reporting by Melinda Dickinson, editing by Jim Loney and Padraic Cassidy)