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Alabama county gives more time for debt deal talks

A manhole cover bears the logo/design of Jefferson County, Alabama
A manhole cover bears the logo/design of Jefferson County, Alabama

By Matthew Bigg and Melinda Dickinson

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County on Friday held off from filing for bankruptcy over a $3.14 billion bond debt and allowed more time for talks with creditors to try to thrash out a restructuring agreement.

The decision means Alabama's most-populous county will not -- for the moment -- declare what would be the largest municipal bankruptcy in U.S. history over its sewer bond debt.

Heeding a plea from Alabama Governor Robert Bentley for more time to obtain more state financial support for a restructuring deal, county commissioners said they would extend by more than a month, until September 16, negotiations with creditors, among them JPMorgan Chase.

They authorized county Commission President David Carrington and Finance Chairman Jimmie Stephens to pursue "direct" talks with creditors to try to gain more acceptable terms for a definitive restructuring settlement.

But in evidence of the steep divide between the two sides over the debt, commissioners unanimously rejected what the creditors had termed an offer for a final settlement.

Summing up a day of complex closed-door and public debate, Carrington said the creditors' settlement offer in its current form was "unacceptable." But he added: "There are some terms in here that we can work with."

"We're going to give it our best effort ... we're going to do our best as a commission to resolve this," he said.

A Chapter Nine filing by the Alabama county, which includes Birmingham, the southern state's largest city and a key driver of its economy, would surpass the one declared by Orange County, California, in 1994.

Since the 2007-2009 recession, fears of such bankruptcies have worried investors and bankruptcy could rattle the country's $3.7 trillion municipal debt market.

It would come on top of a Chapter Nine filing by tiny Central Falls Rhode Island this month.

Jefferson County, with 660,000 residents, contains pockets of urban poverty and some of the richest zip codes in the country.

DEBT DEAL REJECTED

The public negotiation over the creditors' proposal provided a rare insight into the workings of a commission attempting to resolve a crisis that has dragged on for three-and-a-half years.

The proposal included reducing the "aggregate principal amount to $2.326 billion" and an apparent sliding scale of sewer rate increases over several years that did not exceed 7.8 percent.

Both Democratic and Republican commissioners criticized fundamental elements of the offer and expressed suspicion at its wording and the role played by the court-appointed water system manager in the talks.

"It's time the commission took ownership of this debt crisis," said Commissioner T. Joe Knight, rejecting the role water system "receiver" John Young has played as an intermediary in the talks.

Two elements of the deal came under particular fire. Commissioners Sandra Little Brown and George Bowman said the proposed rate rises were unacceptably high and disputed the terms of a fund to be set up to help low-income residents pay.

And Knight said it was unwise for the commission to rely on the state government to pass legislation to support the deal's implementation.

In May, the state legislature failed to pass a bill to establish a key tax to provide fresh revenue for the county's struggling operating budget.

Bentley will call a special session of the state legislature in September, Brown said, but the idea of raising fresh revenues is likely to meet resistance in a highly conservative and anti-tax state.

Bentley has played an increasingly prominent role in trying to strike a deal and he intervened on Friday to press commissioners for more time, said Brown.

Even after commissioners rejected the creditors' offer, the governor described it as "attractive."

"The county and creditors do not have a definitive deal in place yet but they have a conceptual framework that keeps sewer rate increases at a minimum and resolves the problem once and for all for the county," Bentley said in a statement.

Jefferson County, with 660,000 residents, contains pockets of urban poverty and some of the richest zip codes in the country.

It 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.

(Editing by Carol Bishopric)

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