Jefferson County Alabama – Bankruptcy or Bailout?

Jefferson County has 3.2 Billion in Debt from Bonds that Funded a Sewer Upgrade.

In general I like to be right, it makes me feel good when I predict something and it comes to pass, however, the current nightmare I am watching become real is not one of those times.   Since 2009 I have been predicting a collapse of city, county and state governments.  I have also said the cities would look to the counties for a bail out and the counties to the states.  That such madness would continue until the states were forced to beg the federal government for a bail out and in the end the currency as we know it would collapse.

So far I have reported on cities like Pontiac MI, Harrisburg, PA and Central Falls, RI all on the edge of going over the bankruptcy cliff.  Well today I bring you news of the largest municipality so far to hit the wall hard enough to say the “B word” publicly.

The Huffington Post reported 4 days ago that Jefferson County Alabama has an 80% chance of going into bankruptcy.

According to the Huffington Post…

Alabama’s troubled Jefferson County faces an 80 percent chance of declaring bankruptcy, one of its commissioners said on Thursday, as U.S. experts gathered to discuss the implications of a possible Chapter 9 filing.

Another commissioner said the county has yet to hear a response from creditors over its proposal that $1.3 billion be shaved off its crippling $3.2 billion sewer bond debt as part of a settlement to avoid what would be the largest municipal bankruptcy in U.S. history.

Read the Full Article on The Huffington Post

Notice the final phrase?  “The largest municipal bankruptcy in U.S. history.”  Sadly it will pale in comparison to many future incidents but we really need to take this in.  This isn’t a tiny hamlet like Central Falls, it is the worst municipal failure to come to head in our nation’s history.  In fact Jefferson County is the most populous county in the state of Alabama and its county seat is Birmingham.  To put this in perspective Birmingham is the 97th largest city in the US.

To me though the big story isn’t that a county is about to file Chapter 9.  The bigger story is a bailout from the State of Alabama already seems to be on the way.   The Wall Street Journal now reports that the State of Alabama is seeking to help Jefferson County avoid bankruptcy.

According to the WSJ…

While it isn’t willing to offer a “cash bailout” to Jefferson County, the state is open to providing a type of “credit enhancement” that would make a deal between the county and its sewer creditors “more palatable,” Alabama Finance Director David Perry said in an interview.

That “credit enhancement” could involve making Jefferson County’s sewer system an independent entity apart from the county, which Mr. Perry said could help lower the rate that would have to be paid when billions of dollars in sewer debt are eventually refinanced. Such a move would require the passage of state legislation, he said.

“We’re willing to do whatever it takes” for the county to avoid filing bankruptcy, Mr. Perry said. But he warned, without elaborating, that Gov. Robert Bentley “wouldn’t do anything that’s not in the best interests of both the county and the state.” Mr. Bentley, a Republican, previously said he’d support a bankruptcy filing by Jefferson County if its officials chose that course of action.

Read the Full Article at WSJ.com

So the state is coming to the rescue but they are being clear that there will be no “cash bailout”.  Well, sort of, please pay close attention to where Mr. Perry states, “We’re willing to do whatever it takes”  so I would like to ask Mr. Perry what if it ends up taking a cash infusion?

The real story is simple, just as I stated as the cities and counties begin to implode the states step in and try to fix the problems.  The issue though is this isn’t just about a 3.2 billion dollar sewer bond, the county clearly has been spending money it doesn’t have this is just the particular bill they can’t pay.  For instance if a family can’t pay the MasterCard bill it isn’t unrelated to the Visa bill, the jumbo mortgage, the 3 car payments, etc.    So whether Jefferson County gets a “credit enhancement” or “cash bailout” doesn’t really matter, the net result will be reckless spending with no consequence.  Of course this will result in postponing not avoiding a bankrupt county.

Alabama is also doing exactly as I predicted!  They have set the stage for every failing city and county to line up and ask for help.  This of course can only go on for so long.  Other states of course will chart the same course as a similar comedy of errors occurs within their own borders.

The big question I have for you is do you realize why?  This is all to preserve the ability to acquire more debt!  The State of Alabama really doesn’t give a damn about county workers and retirees.  No they want to make sure that they can continue to borrow and spend beyond their means. They don’t want to have to pay higher interest rates on their own bonds.  So funding government by credit card is basically now a status quo to be maintained at all costs.

The reason I am predicting an eventual call from 25 or more of the states to the federal government for a bail out is simple.  With behavior like this, no other result is possible.  When, not if, but when it happens the only way out is a massive inflationary spike to devalue debt by devaluation of the currency.  My belief is at that point the conventional policy of printing money will be insufficient to solve the problem.  The solution will be to rebase the currency and trust me it won’t be pretty when that happens.

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