AMERICA
By Dennis Fisher
HE SAME FINANCIAL MESS THAT’S PUNISHING THE
fi nancial, housing, and automotive industries
is threatening the fi scal viability of many
American cities and towns.
Across the nation, places such as Jefferson
County, Ala., Vallejo, Calif., and Trenton, N.J.,
are staring at bankruptcy. Like their corporate
counterparts, the troubled municipalities fell
victim not only to the withering economy, but
to greed, corruption, and ineptitude as well,
according to experts.
And while the problems in municipal bud-
gets have gone largely unnoticed amid the
broader fi nancial meltdown, fi nancial analysts
now fear municipal economic turmoil could
trigger massive job losses, scuttled public works
projects, billions in loan defaults, and other
problems that could last for several years.
Cities Teetering
“There are lots of layers going on,” Jean tressed homeowners, Jefferson effectively,” White recently told
Everett, a partner at New York law fi rm Hiscock County took out loans in the Fortune. “There was every indica-
& Barclay and an expert on public fi nance, tells early 2000s with payments set tion that they were done princi-
Newsmax. “Jefferson County is plagued by what to balloon to levels impossible pally to run up the fees.”
happened to the variable-rate bond market and for the county to pay. And now, Jefferson County
the downgrade of insurers, which caused inter- By 2002, when those offi cials offi cials are facing the pros-
est to increase dramatically. realized they had borrowed too pect of entering Chapter 9, the
“But that’s certainly not true for all of the much too fast, the county was code that covers the still rela-
[distressed cities]. Some were faster to get out forced to refi nance. With that, tively rare event of municipal
of those securities. The problems are being Jefferson County joined a grow- bankruptcy.
compounded by the credit markets and econo- ing number of cities, towns, and Experts who have studied the
my and fi nancial markets in general.” counties opting for the deriva- situations in Jefferson County,
Jefferson County, which includes the city of tive fi nancial instruments that Vallejo, Calif., and elsewhere
Birmingham, has been teetering on the edge Wall Street was pushing vigor- say that, although the fi nancial
of fi nancial ruin for more than a year now. ously. The derivatives not only crisis gripping the country has
The county has emerged as the poster child for offered lower interest rates for certainly put a lot of pressure on
precarious public fi nances, largely because of the borrowers but also produced already-troubled governments,
allegations of systemic corruption and a crip- monstrous fees for the invest- each situation has its own causes
pling $3.2 billion mountain of debt resulting ment bankers. and specifi c dynamics.
GES
from a badly mismanaged sewer moderniza- One of Jefferson County’s While the mess in Alabama
tion project. bond advisers, Jim White of can be traced to the crushing
TY IMA
GET
The crisis facing Jefferson County began Birmingham investment bank debt load and pending indict-
GAL/
with a decade of wanton borrowing, much of it Porter White, has no doubt ments against numerous coun-
done on terms that would have been diffi cult to about the big banks’ motiva- ty offi cials, the problems that
satisfy even in the best of economic climates. tion. “Some of these deals just pushed Vallejo into bankrupt- AMA/MARK SE
In a parallel to the problems facing many dis- made no sense or were not done cy last spring are the result of ALAB
18 NEWSMAX / JANUARY 2009
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