BIRMINGHAM, Alabama (Reuters) - Creditors made a fresh offer on Thursday to defuse a $3.14 billion bond debt crisis in Alabama’s Jefferson County and prevent the largest municipal bankruptcy in U.S. history.
Commissioner Joe Knight said the creditors, who include JP Morgan Chase, failed to agree to the figure set by the county for a reduction in its outstanding total debt in a potential sticking point to a deal.
But they did meet -- and, in fact, exceed -- the county’s request that politically-sensitive annual increases in the level of sewer rates be kept to a minimum, Knight said.
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.
“The creditors have presented a lower sewer rate increase than the county asked for. It’s a varying number ... It’s a decreasing number and it’s lower (than what the county demanded),” Knight said.
“We don’t have a meeting of minds yet on the debt reduction figure ... The number we sent, they did not say OK,” Knight added.
The county is engaged in talks ahead of an executive meeting on Friday between the county‘s’ five commissioners and county attorneys about whether to continue with negotiations or file for bankruptcy.
A Chapter 9 filing would make it harder for the county to attract investment and could stain Alabama’s reputation for fiscal prudence, since the county contains Birmingham, the state’s largest city and a driver of its economy.
It could also rattle the $3.7 trillion U.S. municipal bond market since any bankruptcy 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 say Friday’s meeting is key because they will not renew a “standstill” agreement started in July to facilitate talks and set to expire.
Commission President David Carrington cautioned against any expectations of a full deal and said the best that can be hoped for by Friday if the county decides against bankruptcy is an outline that would require further negotiations.
“STOP THE BLEEDING”
Carrington is a central player in the talks as is state Governor Robert Bentley, who has played an increasingly prominent role, and John Young, a court-appointed manager for the county’s troubled water and sewer system.
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 be made to 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.
“The fact that they (creditors) are willing to come in with a lower (sewer) rate may sound like good news to some people but we, the people in District 1, we’re still paying more,” County Commissioner George Bowman told Reuters with reference to the district he represents.
“That said, as ugly as a settlement might be, at least it will be a settlement. We can stop the bleeding and begin to repair the body,” he said, in an apparent hint that a deal acceptable to the county might be within reach.
Other outstanding issues include the interest rate at which any debt would be repaid and the length of time for repayment. It is likely that any deal would also depend on a decision by the state legislature to authorize a new tax to alleviate a shortfall in the county’s general.
The county also faces around $1 billion in outstanding general obligation warrants, making its total debt around $4 billion.
Editing by Tom Brown and Andrew Hay