Jefferson County, Ala., will wipe out more than $1.2 billion of sewer debt and residents will face smaller sewer rate increases if the plan to exit its historic $4.2-billion municipal bankruptcy is approved later this year.
The plan, filed on June 30, will be submitted to Judge Thomas Bennett in U.S. Bankruptcy Court in the Northern District of Alabama in August and go before creditors for a vote before another hearing in November.
Final approval would free the county to start issuing $1.89 billion in new warrants to pay its debts.
But it faces paying higher interest rates on the new debt, said Michael A. Sweet, a partner in the San Francisco office of Fox Rothschild LLP.
"A county coming out of bankruptcy is going to have a tougher time" in the financial markets, he said.
He has seen it in California, where instruments with "Stockton" or "San Bernardino" in their names—whether they were issued by those cities or not—have trouble getting buyers.
The bankruptcy exit plan "eliminates more than $1.2 billion of sewer debt and saves the citizens millions of dollars in general obligation and school warrant debt," David Carrington, commission president, said in a statement following the filing.
Since the November 2011 filing, the county government has cut services, vacated buildings, laid off employees and closed a charity hospital. Jefferson County cut costs after losing a major revenue source while facing the massive sewer debt incurred after a consent agreement negotiated with the U.S. Environmental Protection Agency dating from 1997.
The plan calls for sewer rates to increase 7.41% annually for four years and, after that, 3.49% annually. The system's 114,000 account holders now pay an average of less than $38 a month.
"The rate structures the commission has thus far approved will be sufficient to cover operations for the life of the debt and capital expenditures for about 20 years," said Kenneth Klee, partner in Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles, the county's attorney.