In Alabama, a County That Fell Off the Financial Cliff

The New York Times ran a long article Saturday about the bankruptcy of Jefferson County, home of Birmingham, Alabama.

There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

By the time this is over, the lines between state and federal power may be redrawn when it comes to who, if anyone, can force a community to make good on its promises.

The specter of bankruptcy has appeared in discussions of the recession for the past couple of years, and there’s a lot more to say about it. I like that this article highlights the role of bankruptcy law and the many, many relationships between private sector creditors and local governments. Letting governments go bankrupt is often promoted by advocates for breaking contracts between local governments and their employees’ unions (itself a dubious proposition, but a topic for another post). But what happens to all of the other contracts?

The article also highlights what happens when local governments get involved in “risky investments.” An important reminder that fiscal crisis sometimes emerges not government failing to act like a private business, but from government doing exactly that, and being left holding the bag.

Read: Jefferson County, Ala., Falls Off the Bankruptcy Cliff –