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Bankruptcy in Birmingham

We hope the strain of months of watching Greece dance on the edge of a financial cliff hasn’t distracted observers from the portentous developments here in Blue-town, USA.

As the NYT reports, Jefferson County, Alabama, has been on the rocks since last summer, when it declared bankruptcy rather than face the $4 billion tsunami of debt that has been building since the county embarked on an ill-fated sewer project in the mid-1990s. After the EPA accused the county of dumping raw sewage into a river, local leaders decided to embark on a huge public works project to put the county to work and revitalize Birmingham, a rusting city that had been on the decline since the eclipse of its glory days as a great American steel town. The sewer project turned out not only to be a misguided sinkhole that wasted public financing, but also a perfect context for graft and corruption. The new sewer system was never built, boring machines were entombed in half-completed tunnels beneath the river, sewage bills to consumers doubled, and contracts were peddled left and right, sending a dozen officials to jail—including a former mayor of Birmingham.

During the financial crisis in 2008, the interest-rate swaps on Jefferson County’s bonds blew up, leaving the county with even more debt. Now, since the bankruptcy, road kill sits uncollected on the roads, and a newly renovated prison is unused while inmates double up in Jefferson County’s other jail, because the county can’t afford to pay enough prison guards to man both.

Widespread municipal defaults haven’t yet blown up the country, as analyst Meredith Whitney predicted in 2010, but the bankruptcies of Jefferson County, Alabama, Central Falls, Rhode Island, and Harrisburg, Pennsylvania, appear to us here at Via Meadia as ominous examples of the fiscal fragility of many American municipalities, as well as tokens of the breakdown of American governments’ ability to finance and gauge the usefulness of public investments.

Not only can American citizens no longer afford the levels of government services they desire without incurring mountains of debt; increasingly, governments themselves are no longer able to make supposedly useful investments without causing a breakdown of government finances and a rupture of government itself. “Smart” investments turn out to be hotbeds of graft and inefficiency, and beyond bringing to mind other misguided public projects (Solyndra, anyone?), the story of Jefferson County is another example of people and places stuck in an antiquated mindset, turning to old, ineffective solutions for problems of underemployment and slowing growth.

Like the situation in Greece, the bankruptcy of Jefferson County is far from resolved and likely to involve much venomous back and forth between bondholders and pensioners (both of whom were told they would have to take cuts). Meanwhile the hapless citizens are trapped in the middle and likely won’t ever see the light of day on an enormous sewage system that should never have been built and still need services for which there is no money left at all.


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  • Anthony

    WRM, as politics is the realm productive of public policy, the troubles of the county trace back inevitably to politics. Where we find inadequate officeholders chosen by…on the basis of largely irrelevant criteria. Thence, you end up with both pensioners and bondholders concomitant with hapless citizens in a parody of governmental responsibility (fiscal, budgetary, service delivery, etc).

  • justaguy

    One issue about state and municipal debt that intrigues me: because most long-term-debt has to be approved by a bond procedure (often with voter input) can’t the long-term pension debt be wiped out by court or state action?

    One legislature normally can’t bind a future one, absent following very well defined debt procedures, but the pensions have not followed this procedure. Politicians and unions have gleefully flowed through this crack in the system, ammassing trillions in debt from under-funded public union pensions with completely indefensible and crazy goodies such as pension spiking and adding the value of saved leave and sick leave to last year pay for even more spiking. Some public union penions end up more than the annaul salary of employee, and too many minor functionaries end up with pensions multiple times the mean or median income of the public they serve.

    How long before the public says enough and disclaims these ill-gotten gains? It seems that with the exception of a few states that have put pensions in their constitutions, most localities could disclaim their pensions as illegally constituted debts and leave only the existing pension funds to payout a fraction of the pensions.

  • Kris

    “boring machines were entombed in half-completed tunnels beneath the river”

    Despite the ill will I bear them, I am nonetheless saddened by the fate of so many of my former professors.

  • Jones

    Birmingham has……40 years of an yet unresolved county personnel lawsuit,- 5 years sewer project unresolved, – 5 years sewer debt unresolved,- 22 people in prison for fraud. Unaudited books: the county was three years behind with its auditing.- First remember this sewer project was an unfunded mandate put on the county by a federal judge. Politicians love unfunded mandates, no voters, no oversight. -The county tax income in 2010 was 282 million but they spent 3 billion for a sewer plant? The job could have been done for $1.5 billion but shouldn’t have cost 3.2 billion. And we are told it will cost billions more to fix it ? – The highest sales taxes and the highest water bills in the state but no money to pay for law enforcement? – This area has the best and latest health care facilities in the country but the county owns a nursing home and a hospital ? We are refusing more taxes utill spending is under control.
    I saw this with a friend and his son : You cannot bail some one out who has spent themselves bankrupt – because they will just do it all over again

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