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Should bankruptcy be an option for Alabama’s local governments?comment (0)

June 21, 2012

By Jim Williams

Maybe a better question is, “Why should the finances of a city or county ever get so bad that it can’t pay its bills and has to seek protection from its creditors?”

Alabama is one of only 12 states that allows local governments to file for bankruptcy without any kind of approval beforehand. Fourteen states allow filing but have restrictions that may include preventive steps and even outside supervision. Bankruptcy is not possible in 23 states that have no law on the subject, and Georgia actually prohibits local governments from filing for bankruptcy.

There have been 10 local-government bankruptcies in Alabama since 1990. The most significant is Jefferson County’s 2011 filing, which has been called the largest municipal bankruptcy in American history and is affecting the credit of other governments in the state.

The interesting thing is that only a block from the Jefferson County Courthouse stands the headquarters of the Birmingham Public Schools, which currently is subject to state financial oversight. That oversight, designed to prevent any of Alabama’s 132 local school systems from becoming financially unstable, enforces state rules that require such things as balanced budgets and adequate fund balances. In extreme cases the state assumes control of the school system until it returns to financial health.

Although Alabama law since 1939 has allowed the state to investigate county finances, nothing has ever been done to create oversight that would keep counties from veering off track financially. 

Which method better promotes sound local governance — the oversight that the state gives to local school systems or its lack of involvement in county finances?

Some would argue that the state violates the “home rule” principle if it interferes in any way with county affairs, but the privilege of making decisions at home should be enjoyed only by local governments that act responsibly. Others rightfully are subject to corrective supervision. 

The old saying “An ounce of prevention is worth a pound of cure” is sound advice for maintaining good local government in our state. 

In Jefferson County’s case, the state legislature has been faulted for repealing a tax and denying revenue to the county. However, Jefferson County still has revenues that are comparable to other large Alabama counties. Too little attention has been paid to how it uses the money it has. 

EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama. Contact Williams at jwwillia@samford.edu.

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