By Edith Honan
SALT LAKE CITY (Reuters) - Bankruptcy is still a "very strong possibility" for Alabama's Jefferson County, Governor Robert Bentley said on Saturday -- a move that could make for the largest municipal bankruptcy in U.S. history.
A $3.2 billion bond debt related to Jefferson County's sewer system has pushed the county toward the brink, and a rare Chapter 9 municipal bankruptcy could have ripple effects in the $2.9 trillion U.S. municipal bond market.
"It is still on the table, and it's a very strong possibility," Bentley told Reuters during the National Governors Association meeting in Utah's Salt Lake City.
The county is observing a "standstill period" to allow settlement talks with creditors, and this week it finalized a plan aimed at settling the debt to present to creditors.
The debt situation escalated in the mid-2000s when interest on variable- and auction-rate swaps from a refinancing of an upgrade to its sewer system spiraled in 2008.
A handful of U.S. cities and counties have teetered toward economic collapse in the wake of the 2007-2009 recession, which created budget emergencies in most U.S. states,
Two years ago, Vallejo, California, filed for bankruptcy. The Pennsylvania state capital of Harrisburg is reviewing a rescue plan designed to avoid a bankruptcy filing.
New York's Nassau County has been under state oversight since 2000 and in January the state seized greater oversight powers. The tiny Rhode Island city of Central Falls is now effectively run by a state-appointed receiver.
In a separate interview, Rhode Island Governor Lincoln Chafee said it is an "ongoing discussion" as to whether Central Falls would seek bankruptcy protection, but added that he is concerned such a move could hurt other cities.
Bentley said his view of bankruptcy -- an unpopular option because it is expensive and could freeze the county out of the bond market -- has evolved and he is now concerned it could create an "image problem" for the county and state.
The county's main city, Birmingham, is Alabama's largest and the county is a significant driver of the state's economy.
"We're trying to recruit industry in Alabama, and we're trying to recruit industry ... and I really think that hurts us when we have the largest bankruptcy," he said.
"If there's any way that we can negotiate a settlement short of bankruptcy, that is our position."
Bentley said he is not open to sending money to the county. He also said he would agree to support forms of credit enhancements for new county debt, but the state would not guarantee that debt.
"We would support it only with backing from the county," he said. "We're not guaranteeing the debt."
Bentley said an increase in sewer fees would be necessary to generate funds for debt payments, but the increases should not exceed 10 percent.
"We can't allow them to have 25 percent increases, that type of thing," he said.
In the meantime, Bentley said the decision was in the hands od the county commission and the creditors.
"We are trying our best to resolve the issue and I believe that we're making good progress," he said. A moment later he added: "Let's say, we're making progress. I should leave the good off."
(Additional reporting by Matthew Bigg in Atlanta; Editing by Jerry Norton)