BIRMINGHAM, Ala. - Alabama's largest county began laying the groundwork Tuesday for what would be the largest-ever U.S. municipal bankruptcy after three years of trying to work out a solution with Wall Street to more than $3 billion in debt linked to a massive sewer rehabilitation project tainted by corruption.
Officials in Jefferson County hope to avoid new layoffs but may have to raise sewer rates or trim public services. On Tuesday, county commissioners approved resolutions to hire prominent bankruptcy lawyers and to sell bonds later in case money is needed to emerge from a Chapter 9 bankruptcy, the type that can be filed by governments.
Two of the five commissioners said there's an 80 percent chance the county will file bankruptcy, and a vote could come at a meeting scheduled for Thursday in Birmingham, the county seat and Alabama's largest city.
The commission president, David Carrington, said other possibilities include extending talks with creditors led by JPMorgan Chase & Co. or accepting a settlement offer. But something must be done to resolve a crisis that has cast a shadow over the county for so long, hurting economic development and industrial recruiting amid the uncertainty, he said.
"This county deserves a resolution to this problem. We cannot let this thing go on another three years," said Carrington. "We will do what we were elected to do."
Jefferson County's bankruptcy filing would be nearly twice as large as the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion. One of the attorneys retained by Jefferson County had a leading role in representing Orange County.
Jefferson County Commissioner Jimmie Stephens said he favors bankruptcy unless there's "meaningful progress" in talks with creditors, and quickly.
The county already has laid-off hundreds of workers and reduced services because of problems unrelated to the bankruptcy threat, and commissioners said they did not anticipate additional immediate reductions should the county file for bankruptcy.
But Andrew Bennett, who works in a courthouse annex in Bessemer, said he worries that the county will repay lenders at the expense of needy people who cannot afford to pay more for sewer service and would be harmed by any possible cuts in county services.
"It's always the poor people who get left behind," he said.
The county Alabama's historic economic hub with some 658,000 residents has been trying to avoid filing bankruptcy since 2008. The deal it offered last week to JPMorgan Chase and other creditors would erase more than $1 billion of its debt with the promise of repaying the remaining amount through a combination of modest sewer rate increases and loans. But lenders have yet to respond to what amounted to a last-ditch effort to avoid bankruptcy.
"The fact that we have not received a counteroffer speaks volumes to me," said Commissioner Joe Knight.
JPMorgan Chase declined comment.
A court-appointed official last month recommended a 25 percent rate hike for sewer customers, whose average residential bill would increase from $37.74 a month to $46.88, calling it a necessary step toward financial viability. Commissioner Sandra Little Brown said the 25 percent increase is too high, and she prefers filing bankruptcy since cost increases could be limited to the single digits.
The county's problems result from a mix of outdated sewer pipes, the rough economy, court rulings and public corruption.
A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the '90s, and officials used bonds to finance the improvements. Acting at the suggestion of outside advisers in a series of deals that were later shown to be laced with bribes and influence-peddling, the county borrowed money for the project in a complex and risky series of transactions.
Loan payments skyrocketed because of increasing interest rates as global credit markets struggled, and the county could no longer afford to repay the money. In the meantime, a string of elected officials, public employees and business people were convicted of rigging the sweetheart deals that helped put the county in dire straits.
Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford is in federal prison, and McNair's lawyer is now asking President Barack Obama to pardon him for his crimes.
As if the sewer debt wasn't enough, the county has another major problem: Jefferson County already has laid off about 550 of its 2,300 workers and scaled back government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. Callers to a main county telephone number now get a recording telling them the automated system has been taken out of service because of the budget and to look up department numbers the old-fashioned way, in a phone book.
Commissioner Stephens, whose duties include overseeing county finances, said residents wouldn't immediately feel any fallout from a decision to file bankruptcy, but it is unclear what would happen in the coming weeks or months.
Likewise, a decision to file bankruptcy in Jefferson County may not affect the broader municipal bond market.
Matt Fabian, managing director at research firm Municipal Market Advisors, said a filing by Jefferson County was not likely to rattle investors across the country since many have been anticipating the move for years and already have factored it into their risk assessments of municipal bonds in general.
"Probably half the muni market thinks Jefferson County is in bankruptcy already," he said. "It's been so well telegraphed."