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If you ever wondered why municipal bankruptcies are so rare, you needn’t look further than Jefferson County, Alabama.
Fallout from the county’s bankruptcy filing last November was swift and far reaching, with troubling long-term implications.
Services deteriorated rapidly and capital quickly became more expensive for cities and towns across the state. As Bloomberg noted in a recent report, investors are demanding extra yield as inducement to buy the region’s debt.
For the talking heads who’ve made headlines blithely predicting widespread failure among the nation’s state and local governments, or who have suggested bankruptcy as a viable alternative for strapped governments, Jefferson County’s experience will, surely, give them pause for a reality check.
Toppling the dominoes
The county’s financial disaster stemmed from corruption and bad deals involving its sewer system. Despite opposition from Alabama’s governor and others, county commissioners took the highly unusual step and voted to file for bankruptcy. Adding to its woes, in March 2012, commissioners voted to skip a $15 million general-obligation bond payment. Unless state lawmakers break a deadlock over allowing local officials to impose new taxes, the county says it can’t pay.
Since its bankruptcy filing, Jefferson County’s services have deteriorated. According to a Bloomberg report, one jail was closed and another is severely overcrowded even as staff is cut back. Meanwhile, debris from a recent tornado goes uncollected. When the county closed three license plate offices, the line of people waiting at the lone remaining office was so long it had to install portable toilets outside for those waiting to be served. As maintenance workers discovered, even routine tasks are becoming more difficult: While attempting to purchase supplies, the county’s credit cards were temporarily denied.
Others feeling the effects
Problems facing Jefferson County government, however, aren’t confined to the county itself. Its cities are paying more for police protection and other services that were previously provided by the county, with some even tapping their reserves.
The county seat, Birmingham, is also feeling the squeeze. Alabama’s largest city, which has earned an “Aa2” rating from Moody’s and “AAA” from Fitch and S&P, is attempting to sell as much as $150 million of municipal bonds to finance upcoming infrastructure projects.
However, as a result of Jefferson County’s mess, the city’s finance director says Birmingham will have to pay as much as 0.25 percentage points more in yield to attract investors, according to The Wall Street Journal.
Predictably, the outlook for the county is grim. Real estate agents say Jefferson County is a tough sell to potential home buyers and new businesses, further exacerbating its long-term economic prospects.
But the county’s most serious threat might very well be the political firestorm the bankruptcy filing set off in the statehouse. Legislators adjourned its annual session without allowing Jefferson County to reinstitute a $60 million wage tax struck down by the courts, which could cause it to remain in bankruptcy an extra year, and threatens the payments for some of its general obligation debt.
A spokesman for National Public Finance Guarantee Corp., the insurer of about $96 million in Jefferson County general-obligation bonds, told Bloomberg the company will ensure bondholders receive their principal and interest payments on time.
Municipal bankruptcies are extremely rare and, as the state of Alabama and Jefferson County can attest, for good reason. The realities associated with failure stand in sharp contrast to the glib one liners that pundits often use when pontificating on the strained finances of state and local governments and the practical options they face.
Rather than serving as a model for other governments looking for financial solutions, Jefferson County provides some rather unappetizing food for thought.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.