BRADENTON, Fla. - A proposed restructuring plan reportedly being offered by Alabama Gov. Bob Riley to Jefferson County's sewer system creditors would require bondholders to accept a lower interest rate, banks to buy back some or all of the county's auction-rate securities, and swap counterparties to seek reimbursement for termination payments from bond insurers.

The proposed plan, leaked to the Birmingham News and published yesterday, was supposed to be kept under wraps until Wall Street had an opportunity to vet it "before people start attacking it," County Commissioner Shelia Smoot said in an interview with The Bond Buyer on Tuesday.

Smoot said two previous plans devised by the county failed to gain local support for that reason and she declined to discuss any specifics of it.

The third plan being shepherded by Riley is an attempt to avert the largest-ever municipal bankruptcy filing and restructure nearly $3.2 billion of variable- and auction-rate debt and interest rate swaps. However, county commissioners have authorized their attorneys to draw up the necessary papers to file for Chapter 9 bankruptcy in case negotiations fail.

"I think the best thing about having the governor involved is we've got one person running the show," Smoot said. "I hope Wall Street looks favorably at our plan. It's all we have to offer."

"When the governor gets involved, he realizes more is at stake than just Jefferson County and I hope Wall Street understands that," she added.

Riley agreed to step in and take over negotiations if the commission rehired the law firm of Bradley, Arant, Rose & White LLP, and attorney Patrick Darby, who specializes in bankruptcy and workouts. Darby represented the county in negotiations from February through July. The commission Sept. 2 agreed to let the governor intervene and rehired Darby's law firm.

After several hours of negotiations in Montgomery Friday, Riley announced that creditors received a proposed plan to restructure the existing bond debt at lower fixed interest rates over a longer term. The governor's office released no other details about the plan.

"We're reviewing what has been proposed," one creditor told The Bond Buyer yesterday. "We're still negotiating and discussing it."

According to the Birmingham News, the latest plan could also require sewer rate increases up to 2.85% a year. And the paper said other potential revenue streams for debt service, considered in the two previously but failed proposed plans, are not a part of the governor's restructuring plan.

Creditors agreed to respond to the proposal this week.

Saddling only sewer rate payers with increased bills as part of the governor's plan could generate local opposition since many of the sewer system's customers are some of the poorest in the county, which includes Birmingham.

Jefferson County is Alabama's most populous county with 659,000 residents, yet only about 146,000 residents are on the sewer system, said state Rep. Mary Moore, D-Jefferson County. She also noted that sewer rates have risen 329% in the years since 1996 when the county agreed in a federal consent decree to repair failing sewer systems and stop polluting local waters that serve as a source of drinking water.

"People have been calling me all this morning," Moore said yesterday, referring to reaction from her constituents after reading the Birmingham News story about rate increases. "The ratepayers are so poor and the amount they are talking about every year doesn't make sense at all.

"There's something morally wrong when you would force the poorest people to get on the sewers," said Moore, who appeared Tuesday before the Birmingham City Council and the Jefferson County Commission to suggest ways to raise revenue that would help the county refinance its debt and avoid bankruptcy while potentially reducing sewer rates.

Moore, who represents an organization called the Committee to Develop Birmingham, said she has attempted to reach the governor but without success.

"I've been calling his office trying to say you've got to come up with something that's got to include the whole county," she said. "I'm for solving the problem because I do not believe Jefferson County is insolvent. We've given them suggestions that are doable."

Moore's group has suggested that all new subdivisions be required to tie into the sewer system, that the county implement a septic tank inspection program and assess a "clean water" fee on people not on the sewer system, that the county increase commercial and residential development impact fees, and establish a separate authority to manage the sewer system. Her group also believes that the county has not spent all bond proceeds and that those should be used to pay off some of the debt.

Meanwhile, a new lawsuit was filed in Jefferson County on Friday by two realtors and an organization called Citizens for Sewer Accountability.

The 47-page suit asks a court to invalidate the county's issuance of $2.2 billion of Series 2003B and C sewer bonds and $4.28 billion of related swaps because they were based on public contracts that were "allegedly obtained through the bribery and corruption of one or more public officials."

The suit mentions an alleged pay-to-play scheme involving Birmingham Mayor Larry Langford, who formerly headed the Jefferson County Commission, Alabama bond dealer William Blount and his firm Blount Parrish & Co., as well as Albert LaPierre, a lobbyist and close friend of Blount and Langford. All are charged in a securities fraud case filed by the Securities and Exchange Commission.

"It is alleged that each and every contract and agreement in question was tainted and procured as a result of bribery and corruption from the outset," said the lawsuit, which seeks a jury trial.

The suit currently names the investment banks, the financial and swap advisers for the county, and bond insurers as defendants while reserving the right to add future parties.

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