Municipal bankruptcies soar in the United States

By Daniel Schnettler and Marco Mierke Nov 16, 2011, 10:04 GMT

Washington/New York - Debt-ridden, bailout-dependent Greece has nothing on Jefferson County, Alabama, which is already bankrupt.

Home to Birmingham, Alabama's largest city, Jefferson County's government has suffered from a combination of political mistakes, the bad economy and corruption sparked the financial collapse - and Jefferson County is not alone.

Across the United States, local governments have been declaring bankruptcy at the rate of one a month, often with devastating consequences for their communities.

In the wake of the 2008-09 recession, the pace of municipal bankruptcies has been accelerating, even as the rates of business bankruptcies has eased.

Jefferson County is the 12th case this year, according to Bloomberg News.

With a population of 650,000, Jefferson County ran up debts of more than 4 billion dollars, making it the largest municipal bankruptcy in US history.

The previous record belongs to Orange County, California, which buckled under 1.7 billion dollars of debt in 1994.

'It is time to write a new chapter in the history of Jefferson County,' County Commission President David Carrington said in an attempt to reassure citizens. 'It will get better.'

Unlike a failed company, local government cannot just close shop. Essential services, from the police and fire departments to the schools and garbage collection, have to continue.

Local governments that go into default are forced to make drastic cuts in payrolls, especially administrative jobs, while firefighters and other workers face pay cuts and non-essential services such as public swimming pools and parks are in danger of closure.

Residents and public workers are not the only ones to feel the cuts. To put the reorganized government on a sustainable fiscal footing, creditors who bought municipal bonds often lose part of their investments - what was called a 'haircut' when European banks agreed to reduce Greece's debt.

In 1934, at the height of the Great Depression, the US Congress wrote a special bankruptcy law for municipalities, including cities, townships, school districts and county governments. There have been about 500 such bankruptcies since then.

The law grants bankrupt more rights than companies in similar straits. Creditors cannot demand the sale of property, and courts cannot order a custodian.

Recently, Harrisburg, Pennsylvania's state capital, conceded defeat in its battle against debt. The city had overstretched itself on an attempt to renovate a money-losing trash incinerator.

In Rhode Island, the city of Central Falls could not meet its pension obligations.

Not only does a bankruptcy sacre away investors, but it can really end badly.

Vallejo in northern California, for instance, fired police officers because of financial constraints. Drug dealing and prostitution became rampant in the city, and businesses fled. The case has become a warning dissuading other communities from taking such drastic measures.

Jefferson County's problems began in the mid-1990s, when it had to rebuild and expand its sewers and waste-water treatment system, to stop raw sewage from polluting rivers.

The county had to borrow money for the construction. Dubious bankers and corrupt council members pushed the costs and interest rates through the roof.

When the latest recession hit, Jefferson County could no longer afford to continue paying off its mountain of debt.

Now, the county cannot afford to repair its bridges, forcing school buses to take a longer route, adding 2.5 million dollars a year in extra transport costs, broadcaster ABC reported.

Carrington shrugs: 'Our image took a hit in the past couple years anyhow.'