Alabama county faces biggest US municipal bankruptcy

BIRMINGHAM, Ala. - Alabama's largest county appears headed for the biggest municipal bankruptcy in US history, a $3.2 billion mess created by the nation's credit crunch and a colossal, corruption-ridden 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.

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, the interest rates on the debt ballooned.

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.