Alabama county starts bankruptcy decision meeting

Fri Aug 12, 2011 11:08am EDT

* Jefferson County commission meeting to last 90 minutes

* Municipal bankruptcy would be largest in U.S. history

* Commissioner welcomes some elements of creditors' offer

By Matthew Bigg and Melinda Dickinson

BIRMINGHAM, Ala., Aug 12 (Reuters) - Officials from Alabama's Jefferson County met on Friday to decide whether to file for the largest municipal bankruptcy in U.S. history over a $3.14 billion bond debt or pursue a deal with creditors.

The county's five commissioners and its attorneys went into executive session behind closed doors at 9 a.m. local time (1400 GMT) to consider whether to accept a proposal by creditors that include JPMorgan Chase & Co (JPM.N) on restructuring and reducing the debt.

The meeting was to last around 90 minutes, said County Commission President David Carrington.

The commissioners, two Democrats and three Republicans, gave no clear indication as to what they would decide, but one hinted there might be some basis for at least the outline of a deal with creditors.

"The numbers (in the creditors' offer) may be O.K. but the conditions are still not good," Commissioner Sandra Little Brown told Reuters as she entered the meeting at the county courthouse.

Officials have confirmed the county wants roughly $1.3 billion shaved off its debt along with an agreement that sewer rates be raised by no more than about 10 percent annually.

"I'm not happy with the low income assistance or the rate increases," Brown said. At a public meeting in her district late Thursday, Brown said she was split 50/50 on whether the county should go bankrupt.

A Chapter Nine bankruptcy filing is viewed both by Governor Robert Bentley and local leaders as a last resort because it would negatively affect the county's capacity to attract investment and could blight the state's reputation for fiscal prudence.

Jefferson County includes Birmingham, the southern state's largest city and a key driver of its economy.

Bankruptcy could also rattle the $3.7 trillion U.S. municipal bond market since a chapter nine filing would surpass that declared by Orange County, California, in 1994.

Central Falls, Rhode Island, also declared bankruptcy this month but that municipality is tiny by comparison.

Commissioners said Friday's meeting was key because they will not renew a "standstill" agreement with creditors that started in July to facilitate talks and was set to expire.

Jefferson County ran into debt trouble in the mid-2000s when it refinanced an upgrade to its sewer system with auction rate bonds and bond swaps. Interest on the deals spiraled in 2008, when bond insurers downgraded the county's debt.

Some 22 people have been convicted for corruption related to the refinancing deals and some residents argue they should not pay now for disastrous deals done by politicians and big financial institutions years ago.

As a result, the level of sewer rate rises is an increasing source of contention, not just between the county and creditors, but within the commission itself. (Editing by Pascal Fletcher and Jeffrey Benkoe)