Sat, Jul 27, 2013 - Page 9 News List

History offers few happy endings for bankrupt Detroit

Jefferson County, Alabama, is on track to leave bankruptcy by the end of the year, but local officials are bracing for years of stunted government services such as rising utility costs and limited public resources for boosting commerce

By Michael Connor and Tiziana Barghini  /  Reuters, MIAMI and NEW YORK

Orange County, home to Disneyland and with a median household income of more than US$75,000, nearly three times Detroit’s, has suffered few lingering effects from its 18 months in Chapter 9.

“Most county residents were not impacted,” said Mark Baldassare, president of the Public Policy Institute of California. “Police services, streets and road, schools, things that people depend on local government for, went on.”

Orange County also stands out as the only bankruptcy alumnus to successfully re-enter the municipal bond market, but its recovery bonds were fully backed by bond insurer MBIA Insurance Corp, an option that may not be available in the future since the 2007-2009 financial crisis crushed the bond insurance business.

Meanwhile, the jury is still out on Jefferson County, Alabama, which before Detroit had held the mantle as the largest municipal bankruptcy ever at US$4.2 billion that stemmed from debts to overhaul and expand its sewer system.

The county, home to Birmingham, the state’s largest city, is on track to leave bankruptcy by the end of this year. By many measures, it is thriving — its jobless rate is just 5.5 percent compared with the US rate of 7.6 percent; it has a diverse employer base; and private business investment is robust, totaling US$579 million last year, more than double a 10-year average, according to the Birmingham Business Alliance.

Nonetheless, local officials are bracing for years of stunted government services, such as few emergency crews to deal with deadly tornadoes, rising utility costs and limited public resources for boosting local commerce.

“We have no money for economic growth,” said David Carrington, president of the Jefferson County Commission and a negotiator of the county’s debt adjustment plan filed on June 30. “There will be ongoing deterioration of infrastructure.”

Road repairs in Jefferson County, home to 660,00 people, already lag other sizeable Alabama counties, said Carrington, who also worries federal officials will sue over the county’s below-par jails.

“Like any company, you have to grow or you are going to die,” said Robert Brooks, finance professor at the University of Alabama. “This is going to be a strain and make it unattractive for businesses to move into the Birmingham area.”

Jefferson County also hopes to follow in Orange County’s footsteps in returning to the bond market, with a US$1.9 billion debt deal planned for later this year that is central to its negotiated reorganization plan. With slim prospects for the kind of bond insurance enhancement obtained by Orange County, though, the deal is likely to saddle the county with outsized interest rates for decades.

“Clearly, with such a huge liability for such an extended length of time, it is like having a ball and chain around our ankle,” Brooks said.

In the end, though, the enduring costs of a municipal bankruptcy are tallied in more than dollars.

“The impacts of a bankruptcy on a community are pretty hard to predict, but they are not very good. There is a loss of confidence ... there is a lot of anxiety in the city’s workforce,” Vallejo’s Keen said. “We are still the city that all know for being in bankruptcy.”

Additional reporting by Jim Christie and Verna Gates

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