Tag Archives: uncertainty

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.

 

“Kansas Governor Rejects $13 Million in Future Taxes”

Okay, so that isn’t the real headline. The real headline reads: “Kansas governor rejects $32 million federal health care grant.”  But the two headlines may actually be the same.

First, some background: For years, economists have known that states that receive federal grants tend not to use the money to reduce their own spending (despite what theory would predict).  Since money seems to stick where it lands, public finance scholars have dubbed this phenomenon the “flypaper effect.”

Newer research by West Virginia University’s Russell Sobel and Charles Crowley takes this idea one step further. They find that even after the federal money goes away, state and local governments tend to increase their own taxes in order to maintain the same level of services. They found that for every $1.00 a state receives from the federal government, it tends to raise its own future taxes between $0.33 and $0.42. It seems that special interests come to depend on the money and lobby for its maintenance even after the “free” federal subsidy goes away.

So now to Kansas. There, Governor Brownback recently rejected a $32 million grant that was to help the state set up a health insurance exchange portal (i.e., a fancy website). In his statement, the governor wrote: “There is much uncertainty surrounding the ability of the federal government to meet its already budgeted future spending obligations.” So “Every state should be preparing for fewer federal resources, not more.”

Given the research of Sobel and Crowley, this would seem to be a valid concern. If the federal money goes away, the state can expect its own future taxes to rise by some $10 to $13 million.