A preliminary deal approved Friday with Wall Street bankers would allow Alabama's most populous county to avoid the embarrassment of filing the largest municipal bankruptcy in U.S. history. But to help bail their local government out of $3 billion in sewer debt, residents could see tax increases, service reductions and decades of sewer rate hikes.

Even though Jefferson County commissioners approved the deal and some creditors also have agreed, bankruptcy still remains possible since the Legislature must hold a special session to approve the final elements of the agreement.

Commissioner Jimmie Stephens, who oversees county finances, said there was no certainty that legislators would approve the mix of local tax hikes, budget changes and other legislation that could be required. "It's a problem," he said.

The date for a legislative session won't be set until the county and creditors work out details of the settlement, but it's likely for this fall, said David Carrington, the commission president.

Jefferson County has been trying since 2008 to avoid filing bankruptcy over some $3.1 billion in debt, which resulted from a mix of outdated sewer pipes, the lagging economy, court rulings and public corruption. At the same time, it faces a separate shortfall of as much as $50 million in its operating budget because courts struck down a major local tax as unconstitutional.

Creditors want all the county's problems addressed at once to get the government back on stable financial footing. Because of that, Alabama's Republican-controlled Legislature could be asked to allow for tax hikes at the same time as the county increases sewer rates, which commissioners said could rise for 40 years. The county could also cut back on services that aren't required by law, like inspections and zoning, said Commissioner Joe Knight.

In years to come, residents could benefit from the county's shored up finances if it's able to borrow at favorable rates to fund infrastructure projects. But the chief short-term advantage to finishing the settlement would be avoiding a demoralizing blow during a down economy and a hard-to-shake entry in the history books.

The package sounded like a disaster to residents who were waiting as long as three hours in a stuffy courthouse to renew their car tags as commissioners met one floor up. Lines are long because of previous layoffs and office closings.

"It's ridiculous," said Edward Morgan. "Last week when we had all that rain, all the sewers flooded. What are we paying for?"

Marie Gaines said the needy and older people on fixed incomes can't afford to pay more in taxes or sewer bills.

"They need to reduce the sewer taxes and reduce taxes," she said.

Jefferson County has about 658,000 residents and is home to both Alabama's largest city, Birmingham, and its medical and financial centers.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co includes the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and the a series of sewer rate increases. The commission approved it 4-1, with George Bowman casting the dissenting vote.

"They are balancing this debt on the back of the poor," Bowman said afterward.

The agreement would cap sewer rate increases at 8.2 percent annually for the first three years, followed by yearly increases of as much as 3.25 percent for an indefinite period. In the first year, the median monthly bill would increase by $3.10 to $40.84, said the commission president.

Alabama's 1901 Constitution gives state lawmakers a high level of control over county finances, so the Legislature will have to take several steps to seal the debt deal. They will need to approve formation of a public corporation to take over the sewer system, agree to fund the settlement if the county comes up short and pass legislation allowing the county to reallocate money already earmarked for other uses and to somehow replace lost revenues.

It was not immediately clear if there is enough support in the Capitol, but Gov. Robert Bentley said he would work with lawmakers to pass the necessary laws.

"It may have been easier for the commission to file for bankruptcy, but this settlement will result in a much better deal for the ratepayers and citizens of Jefferson County and for the state, with more than a billion dollars in debt reduction for the county," Bentley said in a statement.

A bankruptcy filing would have overshadowed the one filed by record-holder Orange County, Calif., in 1994 over debts totaling $1.7 billion.

JPMorgan welcomed the agreement. "We are encouraged by the county's decision to refinance the sewer debt and look forward to working toward a successful resolution in the coming months," a bank spokesman said.

The settlement proposal could serve as a blueprint for other strapped states and counties that run into trouble over their borrowing, said Municipal Market Advisors managing director Matt Fabian.

"The prominent takeaway is seeing the concessions that Jefferson County was able to wrest from its creditors, which is usually a very difficult thing to do from muni bond investors," Fabian said, adding that news of the deal wasn't affecting prices in the bond market.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the 1990s, and officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling.

Loan payments rose quickly because of increasing interest rates as global credit markets struggled, and the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford and McNair both are in federal prison.

Edward Clabough, among a handful of county residents who attended the meeting, said commissioners should file for bankruptcy rather than repay money the county owes because of corrupt deals.

"Residents should not have to pay for what are obvious crimes," said Clabough.


AP Business Writer Pallavi Gogoi in New York contributed to this report.