Can Detroit Learn from Jefferson County’s Bankruptcy?

News outlets have been locked in speculative frenzy regarding the fate of Detroit since the ailing city first announced its plans for bankruptcy in the summer of 2013.  The city’s endless, troubled waltz with decline has long proven irresistible fodder for journalists and readers alike, and a scandalous bankruptcy is simply the cherry on top.  But for all the hype and speculation devoted to Detroit, the Motor City is neither the first nor the only American municipality to file for bankruptcy.  In November of 2011, an entire county filed for bankruptcy — and lived to tell the tale.  How did Jefferson County, Alabama weather its darkest economic chapter?  And can it teach Detroit any lessons?

Man putting money in suit jacket pocket concept for corruption,

Bribery and Corruption Leads to Debt in Jefferson County

In the winter months of 2011, Detroit hadn’t yet reached the edge of its financial collapse.  While the Motor City was inching closer and closer to critical mass, Jefferson County in Alabama was already plummeting over the threshold.

First founded in 1819, by 2011 Jefferson County had swelled to a population of approximately 658,500 residents. Its borders encompass a smattering of small towns, most notably Birmingham.  While Jefferson didn’t file for bankruptcy until 2011, the county’s money problems were already a decade in the making.

In the early ’00s, then-Commission President (and later, Birmingham Mayor) Larry Langford approved a series of bond swaps.  A bond swap is essentially a juggling act: an investor sells Bond X while simultaneously buying Bond Y with the proceeds from selling Bond X.  One goal of a bond swap is lowering interest payments — but in Jefferson County’s case, the plan failed spectacularly, achieving the opposite effect.  Heaped atop the bond swap fiasco (which was controversial from inception), Jefferson County was also engaged in massive spending on the county’s aging sewer system.

To make an understatement, Langford’s plan for financial improvement backfired.  Throughout 2007 and 2008, Langford was under investigation for bribery and corruption.  By 2009, he’d been handed a staggering 60 criminal convictions, and was removed from office as Mayor.

Still reeling from the bond swap blow, in 2011 Jefferson County invoked federal statute 11 U.S.C. §921 and filed for Chapter 9 bankruptcy.

Court House

Jefferson County and Birmingham Bounce Back

At the time, the county was over $4 billion in the red, with a staggering three quarters of its debt wrapped up in sewer expenditures.  Prior to Detroit’s meltdown in 2013, it was the biggest municipal bankruptcy ever to take place on American soil.  With 700 government workers laid off and 40 long years of repayment looming ahead, prospects seemed bleak.

But then, Jefferson County bounced back — hard.

By 2013, unemployment rates in county seat Birmingham dwindled from 8.6% down to just 6% (a 2.6% employment increase).  The signs of Jefferson’s recovery growing stronger still, the U.S. Department of Labor even ranked Birmingham as the number six best urban area in the country for employment that year.

In the years following Jefferson County’s 2011 bankruptcy, industrial heavy-hitters continued to breathe new life into the area, building jobs and attracting workers.  Mercedes-Benz in nearby Tuscaloosa ramped up production, hiring over 1,000 new employees.  Meanwhile Honda expanded its local plant by 400 workers, and American Steel Pipe spent over $50 million building a new facility in Birmingham.

Detroit’s problems are arguably deeper and more desperate than Jefferson County’s.  In addition to profound debt, Detroit is continually beleaguered by crumbling infrastructure, a gutted job market, property devaluation, and rampant arson.  But while Jefferson County and the city of Detroit are separate entities with separate needs, Jefferson County’s success — largely the product of industrial expansion and crackdowns on corruption — seems to suggest that hope for a comeback could at last be within reach for the Motor City.

If you would like to speak privately with an experienced bankruptcy attorney about how bankruptcy can help you, contact the law offices of Young, Marr & Associates online, or call today at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania.