BRADENTON, Fla. — The first primary election is still nine months away in Alabama, but Jefferson County’s troubled finances already have emerged as a major issue among some candidates eager to replace Republican Gov. Bob Riley, who will be term-limited out of office next year.

With the county unable to access the bond market as an avenue to help resolve its $3.2 billion sewer debt crisis, two GOP candidates who want Riley’s job have called for Jefferson County to file the largest municipal bankruptcy in U.S. history.

One of the candidates, Bill Johnson, this week also called for the governor to step down as the top negotiator with Jefferson County’s creditors, including banks and bond insurers.

Johnson, who resigned as head of the state’s economic development agency to run for governor, said Riley’s judgment about how to resolve the credit crisis in Jefferson County is clouded by the fact that two of his family members are attorneys in Birmingham, the county seat.

The attorneys are with law firms that work on various legal issues for Jefferson County but neither work directly with the legal team negotiating with the county’s creditors.

Still, Johnson said he believes the governor’s family ties with the county are preventing Riley from considering all alternatives to resolve the lingering crisis.

“I know it’s a complicated situation, but the big challenge we have right now is that because this is hanging out there, companies looking to locate in Alabama, and possibly Jefferson County, are holding back,” Johnson said. “It’s this big question mark over the largest county in the state and we need to resolve it as soon as possible.”

Riley’s office did not respond to several requests for a comment.

His spokesman, Todd Stacy, told the Montgomery Advertiser that Johnson doesn’t know what he is talking about because the attorneys related to the governor are not involved with the county’s sewer debt negotiations.

“Gov. Riley hasn’t been involved in the sewer negotiations in almost a year, since he was able to reach an agreement with the county’s creditors to reduce the county’s sewer debt by more than $1 billion,” Stacy told the paper. “No one related to the governor benefits one bit from this.”

Riley has never issued a statement or paper to all the media about the status of negotiations or the agreed-upon concessions from Jefferson County’s creditors.

A year ago he asked New York Insurance Department officials for their assistance because they regulate most of the banks and insurers involved with Jefferson County.

New York officials said they helped negotiate more than $1 billion in concessions, which included $650 million in cash and $350 million that represented the value of swap agreements at the time.

But the county and the state also had to agree to find additional revenue to pay down some of the debt and to place the troubled sewer system under a control board or authority. They still haven’t done that.

While county commissioners did agree to create an advisory board for the sewer system, they did not want to give up absolute control. And legislators earlier this year failed to agree on a funding plan to help the county pay down some of the debt.

In the meantime, investment banks terminated their swap agreements and say the county now owes $766.3 million in swap termination fees.

Seeking assistance,  Riley in May wrote to U.S. House Financial Services Committee chairman Barney Frank, D-Mass., and the ranking Republican on the committee, Spencer Bachus of Vestavia Hills, which is in Jefferson County.

In the letter, Riley said he helped negotiate $1.3 billion in concessions with creditors and a restructuring plan.

But he said the plan would not work without bond insurance and he suggested Jefferson County’s sewer debt restructuring would be the “perfect pilot program for a federal bond insurance or guaranty program.” His office has not said whether Frank or Bachus ever responded to Riley’s letter.

Since then, Jefferson County’s fiscal situation has deteriorated because a local judge struck down an occupational tax that provided about one-third of the revenue for the general fund budget.

The county laid off 1,000 employees but is making plans to bring them back to work in the next two weeks.

The state Legislature in mid-August met in special session and approved a new occupational tax, which the county is now collecting.

Early last year during the bond market crisis, Jefferson County’s variable- and auction-rate sewer debt soared to penalty interest rates the sewer system could not pay, and the county’s credit ratings plummeted to junk status.

While the county is in payment default, the sewer debt is non-recourse, meaning that investors cannot force the county to use revenues other than those from the sewer system.

The lingering crisis hurts economic development prospects, said Johnson, who resigned in late June as director of the Alabama Department of Economic and Community Affairs to run for governor.

While he worked for the state, Johnson said he heard local officials complain about problems getting to the bond market because of Jefferson County’s unresolved situation.

“From conversations I have had, these unresolved problems place us in limbo and are hurting the county and hurting the state,” Johnson said, noting that companies making investments in new locations want to “lock down as many uncertainties as they can.”

Last week, another candidate for governor, state Rep. Robert Bentley, R-Tuscaloosa, said that the county should immediately file for municipal bankruptcy “because Jefferson County is the economic center of Alabama.”

Bankruptcy would deal with the 20-month-old crisis, according to Andreas Rauterkus, assistant professor of finance at the University of Alabama in Birmingham.

“At this point the reputation of the county has reached its lowest point, so bankruptcy will not be as damaging as it would have been a year ago,”he said. “It would force a solution, and after all the uncertainty for the past year and a half the market is looking for a resolution regardless of what it is.”

“Because of the economic conditions in the country,” Rauterkus added, “the market might actually be a little bit more forgiving than it would have been otherwise.”

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