Alabama's Jefferson County will within two or three months file a workout plan that calls for reducing the bankrupt local government's $4.23 billion of debts by more than $1 billion, according to the county's top elected official.
Filing a plan of adjustment, which is being readied as the county negotiates privately on terms with some creditors and battles in court with others, is a key step toward ending Jefferson County's landmark 2011 bankruptcy but it must be approved by a federal judge.
"Our final plan will include a reduction of more than a billion dollars," Jefferson County Commission President David Carrington said in an interview, declining to discuss details. "But there are other elements, too, that are just as important, like lower interest rates and extended payoff times."
Bankruptcy lawyers say there are too few precedents involving big local governments in bankruptcy to say what a plan might entail, though debt concessions such as extending the terms of bonds or reducing interest payments are frequently included.
The county, whose finances were ravaged by run-away sewer-system debt costs, political corruption and a legal case that killed a local tax, expects to file the adjustment plan within 75 days, Carrington said.
The county's target for filing may be a counter to creditor lawyers trying to scuttle the bankruptcy. They have repeatedly complained in court filings that Jefferson County was moving too slowly on developing an adjustment plan and that the bankruptcy case should be voided.
But U.S. Bankruptcy Judge Thomas Bennett has refused to set a deadline, noting the case was highly complex financially and legally.
Home to Birmingham, Alabama's biggest city, Jefferson County has sole authority to draft the plan under U.S. law. Creditors consent is not required to win a judge's approval but cuts in loan amounts or other changes must be deemed reasonable and equitable by Bennett.
Unlike corporate bankruptcies, in which creditors can seek asset sales or liquidation, so-called Chapter 9 bankruptcies named for a section of U.S. bankruptcy law leave large creditors such as JPMorgan Chase and Bank of New York Mellon open to possible non-negotiated reductions.
"County leaders hope to propose a plan with the consent of sewer creditors, but are prepared to 'cram-down' the plan on dissenting creditors," reported The Birmingham News newspaper, citing unnamed county officials.
Municipal bankruptcies are rare, and Jefferson County's plan may hold clues to how other troubled U.S. local governments may end crises caused by overwhelming debts and shrinking revenue. Detroit, which is widely seen as near bankruptcy, was taken over on Thursday by a state-appointed emergency financial manager.
Jefferson County's November 2011 bankruptcy filing remains the biggest ever by a U.S. municipality and was primarily driven by the sewer-system debt now estimated at $3.2 billion. The fiscal crisis forced large staff cuts and major reductions in county services.
Carrington said in the interview on Wednesday that negotiations with holders of some of Jefferson County's defaulted debt, including owners of education warrants, were progressing favorably. In addition, the county has so far reached negotiated deals with two creditors.
Bond insurer Ambac Assurance Corp agreed last year to reduce the county's $83 million a year payments on lease revenue warrants. European lender Depfa Bank Plcin February signed off on cutting interest rates on variable-rate school warrants in exchange for accerated payments by the county.
But the county's biggest creditors mostly holding sewer debt, such as JPMorgan, have shown little willingness to compromise, Carrington said, and are pressing ahead with appeals and other court actions.
A hearing on a dispute over hikes in sewer-system rates, which provide payments to sewer creditors, were scheduled to resume on Thursday in U.S. bankruptcy court in Birmingham. The court battles cost the cash-short county $1 million a month.
One possible template for the adjustment plan may be a 2011 terms sheet, which was developed by some creditors and the county before the Chapter 9 filing. It envisioned a $1 billion reduction in county debt but was never implemented.
The pre-bankruptcy terms included three years of sewer rate hikes of as much as 8.2 percent annually and a refinancing of about $2.05 billion of county sewer warrants into a 40-year debt backed by a pledge from Alabama's state government.
A regional business hub with substantial banking and medical sectors, Jefferson County has slashed its annual spending in its current fiscal year by $107 million from a year ago to $205 million. Officials have closed jails, ended in-patient care at a Birmingham hospital, and reduced the county payroll by 1,300.
County finances are too thin to fund any capital spending but were feeling some lift in early 2013 from an improving economy, according to County Manager Tony Petelos.
(Additional reporting by Verna Gates in Birmingham; Writing by Michael Connor in Miami; Editing by Tiziana Barghini and Andrew Hay)