Coming to a Municipality Near You: Bankruptcy

After earning the dubious distinction of passing the country's most draconian anti-undocumented worker law (that I wrote about today), Alabama added another feather to its dunce cap this week. Its most populous county, Jefferson, filed the largest municipal bankruptcy in the history of the United States.

Jefferson County's troubles began in the 1990s when a federal court forced it to upgrade its sewer system to meet the EPA's clean-water standards. But the project got bogged in cost overruns from the get go, thanks to massive corruption. "Officials used bonds to finance the improvements," explains the USA Today. "Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling"

The project's financing costs, among other things, put the county in a $4.1 billion hole. In an attempt to stave off bankruptcy, Jefferson persuaded JPMorgan Chase and its other creditors to write off about $1 billion in debt and refinance another $2 billion. On its end, it agreed to hike taxes and sewage fees and undertake other budgetary changes to pay the rest of it. But it couldn't get approval from the state legislature for the plan, making bankruptcy unavoidable.

Does all this mean that Jefferson's problems are unique and everyone else can sleep easy? Not really.

The reality is that Uncle Sam might be drowning in deficits and debt but corruption is a far bigger problem at the local level. If you live near Detroit (as I do) and have observed the antics of Mayor Kwame Kilpatrick (who recently came out of jail after serving time for perjury, obstruction of justice etc., only to find himself the subject of an FBI probe for a kickback deal) and the Detroit City Council (one of whose former members, Monica Conyers, is in prison for accepting bribes), you know that the notion that government is more accountable when it is closest to the people is something of a fairytale.

This corruption might have been affordable when a flush economy was pumping tax revenues into local coffers. But that is not the case anymore. What's more, states and municipalities across the country have promised $3.5 trillion—about a quarter of the national GDP—in pension and other benefits to their employees that they don't have funds  to pay.

The upshot is that many local governments are on the brink and could collapse anytime. My Reason Foundation colleague Harris Kenny last month put together a helpful list of the nine most vulnerable municipalities when Harrisburg, Pennsylvania, filed for bankruptcy. Jefferson was number three. Two others—Pontiac and Detroit— are in Michigan, my fair state. Pontiac, incidentally, became something of a national joke recently when it sold the Pontiac Silverdome, former home of the Detroit Lions, for the grand price of $583,000 after having spent $55.7 million to build it 35 years ago. About Detroit, 'nuff said already.

For Kenny's whole list, go here.