Global No-Confidence Vote: It's All Local

It seems Jefferson County, Alabama (home of Birmingham) is facing the largest municipal bankruptcy since the OC went under in '94.

Jefferson County, Alabama, won't make an $83.5 million payment on some of its $3.2 billion of sewer bonds, as it continues to seek more time to negotiate an end to the debt crisis that has pushed it close to bankruptcy.

Jefferson County Commission President Bettye Fine Collins said yesterday that Wall Street creditors indicated they would be willing to extend a new agreement allowing the county to avoid paying all that it is required on its bonds. Meantime, the county will miss a payment on a portion of the debt, she said.

``We don't have the funds to cover these interest payments,'' Collins, a Republican, said in a telephone interview from Birmingham.

Jefferson County, which includes Birmingham, has prepared to file for bankruptcy protection if it can't reach an agreement with JPMorgan Chase & Co. and other creditors to refinance bonds whose interest rates soared as high as 10 percent because of the U.S. financial crisis spawned by the subprime mortgage meltdown. The county is among U.S. states and cities in the $2.6 trillion municipal market whose finances have been pinched by debt costs that have risen more than fourfold in some cases.

Ahh, but Jefferson County isn't alone, folks. Times are tough for local governments across the country.

Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.

The sudden loss of credit, one of the ripple effects of the current financial turmoil, is affecting local governments in all parts of the country, rich and poor alike. In New York, a real estate boom has suddenly gone bust. Washington has shelved a planned bond offering to pay for terminal expansion and parking garages already under construction at Dulles and Reagan National Airports.

Billings, Mont., is struggling to come up with $70 million more for a new emergency room. And Maine has been unable to raise $50 million for highway repairs.

“We really are in terra incognita here,” said Robert O. Lenna, executive director of the Maine Municipal Bond Bank, which helps that state’s towns and school districts raise money. He said he had worked in public finance for 34 years and had never seen credit evaporate so completely.

Maine had already begun some of its road work when the bond markets stopped functioning, so now it is scrambling for bank loans to keep the dump trucks rolling. If money does not start flowing soon, Mr. Lenna said, Maine will have to cancel some of its road and bridge projects.

The only alternative would be what New York City did on Monday: Go into the locked-up markets and whip up demand by offering to pay investors a very high return.

Analysts said the dysfunction in the municipal bond markets appeared to signal the end of an era of relatively cheap money for governments and, probably, the start of an era of tough choices for communities. When the market starts moving again, they said, it will look a lot like the municipal bond market of 10 years ago, before the arrival of financial wizardry in the form of structured-finance products, which lowered borrowing costs but added big new risks. Instead, governments will probably be issuing plain-vanilla bonds with fixed rates of interest, higher than they are accustomed to.

And higher rates suggest some degree of belt-tightening, especially difficult in places where tax revenues are being squeezed because of falling real estate values and the slowing economy.

It's bad out there. I have a friend who works for the City of Cincinnati in the budget department and she tells me things are bad, and that significant city job cuts are coming. It's like that all over the country, folks. Service cuts, job cuts, and tax hikes are coming for the local and county governments where YOU live and work, and Jefferson County, Alabama isn't going to be alone in having to consider municipal bankruptcy.

It's going to get bad for a lot of taxpayers next year. Unemployment is going to be up significantly, bailout or no bailout. With home prices continuing to drop and property tax revenues dropping as a result, and the credit crunch meaning these governments can't borrow money cheaply any more to cover costs, you're going to see a lot of local governments have to make some very tough and very unpopular decisions. They WILL have to slash the services you depend on or raise taxes sharply.

If they don't, they'll go under.

Imagine the bailout argument being repeated across nearly every county and city government in America right now. Who is going to bail them out? Who is going to lend them money by allowing them to issue bonds? What if bonds are rejected by voters in places where bond referendums go to the ballots?

We're talking about local and country governments across America declaring bankruptcy. And the Bailout in front of Congress this week does little to address the problem. Home prices will continue to drop well into 2009 if not 2010, meaning lower tax revenue, astronomical bond interest, and job and service cuts. The job cuts mean higher local unemployment and lower revenues as people move out of the area looking for new jobs or are forced to move.

It's a nasty spiral. And it's taking place right now, where you live.

Your local government's not going to be able to help you in the months ahead. Odds are very good major tax increases, local job cuts, and local service cuts are coming. They are going to be dramatic.

You're on your own.

Be prepared.

Cross-posted at the Frog Pond.