Tag Archives: ID

Bankruptcy in Birmingham

Jefferson County, AL has filed for bankruptcy protection, joining the ranks of Vallejo, CA; Central Falls, RI; Boise, ID; and Harrisburg, PA. In this case, the debt that the county used to finance a new sewer system is the main driver of insolvency. The county currently owes about $4.15 billion on the sewer system.

The Associated Press reports:

The problems were years in the making.

Its debt ballooned after a federally mandated sewer project was beset with corruption, court rulings that didn’t go its way and rising interest rates when global markets struggled.

Since 2008, Jefferson County tried to save itself the cost and embarrassment of filing for bankruptcy. But after three years, commissioners voted 4-1 to bring the issue to an end.

“Jefferson County has, in effect, been in bankruptcy for three years,” said Commissioner Jimmie Stephens, who made the motion to file for protection in federal bankruptcy court in northern Alabama.

While the last few years have seen a few cases of municipalities filing for Chapter 9, Jefferson County’s case represents by far the largest. Unlike other recent bankruptcies that were a result of both poor financial management and the economic downturn, Jefferson County’s problems were in part a result of corrupt public officials. Twenty-two people have been convicted for illegally refinancing the sewer bonds to benefit local and Wall Street financiers. Residents in Alabama’s largest county will likely face higher sewer rates as a result.

But the biggest problem for residents when municipalities file for bankruptcy protection is the resulting policy uncertainty. Businesses are typically reluctant, with good reason, to move to a bankrupt municipality. The shadow of Chapter 9 means that for years, residents and businesses will be paying higher taxes in exchange for fewer services because of the remaining debt burden. This will put the county and even the state in a poor competitive standing for new jobs.

In 1994, Orange County, CA, filed for Chapter 9 protection on $1.7 billion in debt, and residents there are still paying taxes toward that debt today. In the short term, Jefferson County will face painful and immediate cuts. The Birmingham Business Journal spoke with Commissioner Jimmie Stephens on what the future holds for the county:

“We’re looking at all of these services that are not mandated by the constitution and, from there, we will begin the reductions and take it as far as we need to, keeping in mind the services that the citizens need,” he said.


Proposition 19, Bootleggers, and Baptists

It was nearly 30 years ago that Bruce Yandle penned his influential “Bootleggers and Baptists” essay. The unintuitive thesis is that some government interventions endure because of an unusual (and often unrecognized) agreement between two distinct groups. On the one hand are those who want to see the intervention continue for moral reasons (he calls them “Baptists” in reference to the Baptists who supported the prohibition of alcohol). On the other, are those who benefit from the artificially high price that results from prohibition (he calls them bootleggers).

NPR reports today that California’s Proposition 19—which would legalize and regulate marijuana for recreational use—has generated some unlikely political alliances. As Yandle would predict, many police and mothers are against decriminalization. Surprisling, however, some moms are for it. Skyla Chapman, for one, argues:

When it’s regulated, then it’s no longer in the drug dealers’ hands. It’s in respectable businesses’ hands. They’ll card or ID you.

Consistent with Yandle’s thesis, some stoners are skeptical of decriminalization. They worry that the regulations may be more burdensome than the current regime which permits pot use for medical purposes. They also worry that the decriminalized price will plummet, hurting current sellers. One seller, (appropriately) named Jay, opposes Prop 19. Jay skirts the current law, selling to people for recreational as well as medical use. He worries:

Everyone’s really scared of the prices going down….We all have invested money here, we all live here. I have a daughter here, my wife’s a teacher. Everyone’s scared because we don’t know what the prices are going to be. Already, the prices have gone down and down. It’s harder to sell it.

The story illustrates an important point that my progressive friends rarely acknowledge. Many of them would like to think of regulation as a sort of brake system on the Indy-car that is the market. They imagine prudent well-informed regulators applying the brakes when the cars get going too fast, saving them from veering off the road.

Seen through the bootleggers and Baptists model, however, the story is different. Under this model, cheaters (Bootleggers) actually support the application of the braking system. They, of course, dismantle their own brakes so that regulators can’t apply them. But they are all-too-happy to see the brakes applied to their competitors’ cars. And like the current sellers of pot, they are disapointed to see the brakes removed.