BRADENTON, Fla. — Jefferson County is asking creditors holding its $3.14 billion of defaulted variable- and auction-rate sewer warrants to take a haircut of $1.3 billion, the Birmingham News said Sunday.

Birmingham is the Jefferson County seat and the largest city in Alabama.

The paper said it obtained details about the county’s settlement offer, which was presented to creditors last week by the sewer system’s court-appointed receiver, John Young.

In addition to the forgiveness of debt, the county reportedly wants creditors to agree to “single-digit annual rate increases” for sewer system customers over several years.

In return, the county said it would agree to the creation of a Government Utility Services Corporation to refinance the sewer debt and operate the sewer system, the newspaper said.

The GUSC would be formed by the Legislature. Creditors reportedly want lawmakers to prohibit the corporation from filing for bankruptcy.

Jefferson County also would agree to “settle or suspend” certain litigation involving creditors if an agreement is reached, according to the paper.

A number of banks, bond insurance companies, as well as institutional and retail investors hold the county’s sewer debt.

JPMorgan, Jefferson’s largest creditor, could not be reached for comment about the county’s latest offer.

Last month, Young — who was appointed to handle the sewer system’s receivership by an Alabama judge last year — proposed 25% rate hikes over several years as part of a plan to address the troubled non-recourse debt.

Young had proposed holding a public hearing on his plan on July 29 but later agreed to postpone it after the county government threatened to file for bankruptcy.

The county withdrew its threat to enter Chapter 9 when Young agreed to a 30-day standstill agreement delaying the implementation of his receivership plan so negotiations with creditors could continue.

At the same time, Jefferson County is also dealing with the loss of an occupational tax that provided a major source of revenue for its general fund.

That tax, originally authorized by the Legislature, was struck down by the Alabama Supreme Court earlier this year.

Lawmakers refused to enact a replacement tax or provide any other source of revenue during their regular session this year.

Commission President David Carrington would not comment on sewer negotiations or details in the Birmingham News story regarding a settlement offer.

Even if the county and creditors reach an agreement to refinance the sewer debt, the county could still be forced to file for bankruptcy, he said.

“Due to the loss of the occupation tax, the county could resolve the sewer debt crisis and still face a Chapter 9 because of the stress in the general fund,” Carrington said in an e-mail to The Bond Buyer. “That’s about all I can say for now.”

County commissioners have scheduled a special meeting on Thursday during which they will meet in private with attorneys to discuss legal strategies.

Commissioners reportedly said that if progress is being made on negotiating a settlement to the sewer debt problem, they could agree to extend the standstill period.

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