BRADENTON, Fla. - Jefferson County, Ala., commissioners this week are continuing to sort out severe budget problems that have, for the moment, seemingly overshadowed the county's $3.2 billion sewer debt crisis.

The budget problems have increased speculation once again that Alabama's most populous county, whose seat is Birmingham, may file the largest-ever municipal bankruptcy in the U.S.

Commissioners have warned that because a judge struck down a major source of revenue supporting the county's general fund, they expect to run out of money in a few weeks.

The commission had begun the process of preparing for significant budget cuts and employee layoffs when the county was sued by its sheriff and Cooper Green Hospital, a publicly owned facility.

The sheriff has claimed he would lose one-third of his budget, which would endanger public safety. A hearing on the sheriff's suit was expected to conclude yesterday. The hospital has alleged that the county improperly diverted money it was to have received to the general fund.

The problem revolves around an occupational and business license tax that a local judge ruled unconstitutional in January. While the county is appealing the ruling to the Alabama Supreme Court, only the Legislature can offer quicker relief by reauthorizing the tax in a constitutional manner.

But local state representatives and senators have squabbled for months about a plan to restructure the tax and whether it should be levied at the same rate as it was previously applied. The tax, which has been in effect for years, supports one-third of the county's general fund revenue. It raised $75 million last year.

In Alabama, local legislative delegation lawmakers must approve a bill that applies only to their region before it can be considered by the full House and Senate.

Some lawmakers were meeting this week to discuss various versions of a bill, but it was not clear if the majority of the local legislative delegation participated in the meetings.

Gov. Bob Riley has said he would call a special session of the Legislature if there is agreement on a bill.

In the Birmingham region on Tuesday, Riley warned of what could happen if Jefferson County is allowed to run out of money.

"I think that's something that can have lasting consequences for this whole area when it comes to economic development for the next generation," he said. "The County Commission is not going to be able to fix it.

"The only people who can fix it now are state representatives and state senators, and I would urge everyone to call [them] and say you've got to get together, you've got to put partisanship aside, you've got to work together, because once you go down this path of not living up to your obligations, I think there's going to be a stigma attached that's going to be very difficult to ever overcome," Riley said.

Jefferson County commissioners last fall asked the governor to help facilitate discussions with creditors holding the county's troubled $3.2 billion of variable- and auction-rate sewer debt, but her has not released a statement in months about the status of efforts to restructure the debt, nor has his office responded to inquiries about it.

In late May, Riley wrote to the U.S. House Financial Services Committee and appealed for a federal guarantee that would enable the county to restructure the sewer debt in order to avoid a "massive default," an event he warned would reverberate through the municipal bond market.

In previous months, the county technically defaulted on accelerated payments of its variable-rate debt by negotiating forbearance agreements and calling upon bond insurers to pay claims.

But the first actual payment default occurred July 1 when Syncora Guarantee Inc., which has seen its own credit ratings tumble to junk levels, was unable to pay a $46 million claim because net sewer revenues were insufficient to pay debt service.

Syncora suspended paying all claims in April to focus on restructuring its exposure to troubled residential mortgage-backed securities it insures and to meet its minimum capital requirements. The insurer was still negotiating a tender offer for those securities yesterday.

However, a determination as to whether Syncora is solvent and can remain in the municipal bond business could be made by week's end by the New York Insurance Department, which regulates the insurer.

Even if Syncora is declared solvent and pays Jefferson County's July 1 claim, restructuring the sewer debt will remain difficult because of the county's low ratings, which plummeted last year as negotiations dragged on and fears of a bankruptcy filing mounted.

Moody's Investors Service rates the county's sewer debt Caa3 and its general obligation debt Caa1. Standard & Poor's maintains split ratings of C and D on the sewer debt. The agency's rating on the county's fixed-rate GOs is B, while it assigns a D rating to approximately $120 million of variable-rate GOs.

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