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Ala. county faces biggest US municipal bankruptcy
Alabama County Bank 5889902
In this June 28, 2002 photo, a worker walks through a 3,800-foot pipe that was part of massive sewer improvements in Jefferson County, Ala. Lingering debt from the project is threatening to drive the county into what would be the largest municipal bankruptcy in U.S. history at $3.2 billion. - photo by Associated Press
    BIRMINGHAM, Ala. — Alabama’s largest county appears headed for the biggest municipal bankruptcy in U.S. history, a $3.2 billion mess created by the nation’s credit crunch and a colossal, corruption-riddled sewer project.
    Politicians in Jefferson County — which has 658,000 residents and includes the state’s biggest city, Birmingham — are struggling to find a way out of the jam, but they have mostly abandoned talk of raising taxes and fees after running into fierce opposition at raucous public meetings.
    On Thursday, with their options running out, the county commissioners all but threw up their hands and decided to let the voters weigh in on Election Day with a nonbinding referendum on whether to file for bankruptcy.
    ‘‘The entire nation is watching to see how we handle this,’’ said Jeff Sewell, an assistant county attorney. ‘‘This is a question of character as well as one of finance.’’
    A bankruptcy filing by Jefferson County would shatter the previous record of $1.7 billion, set by Orange County, Calif., in 1994.
    A Chapter 9 bankruptcy filing would put interest payments and lawsuits against the county on hold, giving it time to put its finances in order and negotiate more favorable terms with its creditors.
    But it could also lead to tax increases, spending cuts and layoffs among the county’s 4,000 employees.
    And it could damage the county’s credit rating for years to come, making it more expensive to borrow money and more difficult to finance the infrastructure improvements that can draw industries to Birmingham, a banking and medical-research center once known as the Pittsburgh of the South, back when it was a steelmaking powerhouse.
    The county got into trouble after it was forced by the courts to undertake a huge upgrade of its sewage system to meet federal water standards and stop raw and partially treated waste from being dumped into streams.
    Acting at the suggestion of outside advisers, the county borrowed money for the project on the bond market in a complex and risky series of transactions. When the mortgage crisis hit and banks began tightening up on their lending, the interest rates on the debt ballooned.
    The nearly completed sewer project, under construction since 1996, is now burdened with a debt of $3.2 billion.
    The crisis has come amid a federal bribery-and-kickback scandal involving contracts awarded on the project. Twenty-one people have been convicted in the still-unfolding case, including contractors, engineers and two former county commissioners.
    Federal investigators say some of the deals by which the project was financed were corrupt, with politicians suspected of steering investment business to friends for kickbacks. But they say the corruption didn’t directly lead to the runaway debt.
    Because of the project’s costs, water rates have gone up 329 percent since 1997, with the average customer now paying about $65 a month. Those increases, combined with the investigation of possible sweetheart deals, have left taxpayers angry and distrustful.
    ‘‘I’m just really disgusted with the incompetency of these officials,’’ said resident Frank Denney, an engineering consultant.
    The graft investigation reached a shocking point last year with the bribery conviction of former Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous racist church bombing in Birmingham in 1963. McNair, who oversaw the sewer work from 1996 until he resigned in 2001, was sentenced to five years in prison.
    Among those still under suspicion is former Commissioner Larry Langford, who was elected mayor of Birmingham last year in a landslide. He has denied any wrongdoing.
    The county has won repeated extensions from its creditors since March, with the latest one running through mid-November. After that, it is unclear how long the crisis can go on.
    Jefferson County isn’t alone with money problems. Leaders in Vallejo, Calif., voted to file for bankruptcy in May, citing a $16 million deficit blamed on declining tax revenue linked to a large number of foreclosures.
    A decade ago, Orange County cut its budget and workforce to help it climb out of bankruptcy, and Vallejo wants to void its labor contracts to save money, a move that is being fought by the unions in court.
    A majority of the Jefferson County Commission has come out against filing for bankruptcy.
    ‘‘I am firmly convinced that bankruptcy or default would irreparably harm this county,’’ said chairwoman Bettye Fine Collins.
    The head of the state pension system, David Bronner, has instead proposed that it buy the sewer system for as much as $1.4 billion to give the county an immediate infusion of cash so that it can put its affairs in order. Then, after a few years, the sewer system would be sold back to the county.
    ‘‘It’s a nice, safe utility. But it has to be clean. It can’t have $3.2 billion in debt on it,’’ Bronner said.

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