Alabama governor begins push for sewer-debt plan

By Melinda Dickinson

BIRMINGHAM, Alabama (Reuters) - Alabama's governor on Tuesday began campaigning to convince state legislators to approve a proposed restructuring of Jefferson County's $3.2 billion of troubled sewer debt that includes wiping $1 billion off the tab.

Hammered out in recent weeks with help from New York regulators, the debt forgiveness offer from banks, other creditors and bond insurers requires Alabama's biggest county to raise local sewer rates and to accept an oversight panel for the sewer system, officials said.

The offer appears to respond to a Jefferson County demand and was meant to avert a threatened bankruptcy pleading by the county that could be the biggest municipal bankruptcy in U.S. history.

JPMorgan Chase (JPM.N) Bank of America Corp (BAC.N) and bond insurers Syncora Guarantee, a unit of Syncora Holdings Ltd SCA.N, FGIC Corp's unit Financial Guaranty Insurance Co, and Financial Security Assurance Inc all back the offer, New York State Insurance Superintendent Eric Dinallo said in an interview.

Alabama Gov. Bob Riley, a Republican, met state legislators from Jefferson County in Montgomery, Alabama as part of an effort to win support for the offer, a spokeswoman said.

"Each member of the delegation, I believe, would like to avoid bankruptcy and several of them expressed ideas on how to best achieve that goal," Riley said in a written statement.

Opinions among members of Alabama's state legislature have been mixed at best over past proposals for restructuring the debt since the county's financial crisis began in February. The legislature must approve certain elements of any plan.

Dinallo, a participant in negotiations in New York, said the debt forgiveness offer was composed of about $650 million of cash and an elimination of $350 million in payments tied to interest-rate swaps.

The swaps, which were meant to lower interest costs for the county but backfired due to the global credit crisis, are the root of the financial crisis.

Separately, Riley sent a letter to the federal government asking the Treasury Dept. to use money from the $700 billion Troubled Asset Relief Program created last week to guarantee some of Jefferson County's debt.

No decision on requests from local governments for aid has been made, according to the White House. "We're talking to the states and reviewing the issue," White House spokesman Tony Fratto said.

Late on Tuesday, the Jefferson County Commission scheduled a vote for Thursday on an extension until October 31 of a forbearance agreement. The current standstill agreement preventing debt default penalties expires Wednesday.

(Writing and additional reporting by Michael Connor in Miami; additional reporting by David Lawder in Washington, editing by Leslie Gevirtz)