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As we debate our federal budget problems on the national stage, many state and local governments are being forced to do the same. Following the news of several other local bankruptcies, Alabama refused to bail out Jefferson County, and it recently became the largest municipality to file for bankruptcy. According to economist Scott Beaulier, a Troy University economics professor, state leaders sent the right message to other Alabama counties by not intervening in Jefferson County's affairs.

“Jefferson County commissioners were very weak when it came to austerity. Even when the county was heading for bankruptcy, pay raises were being recommended for county employees,” said Beaulier. “County expenditures grew from $808 million in 2010 to $817 million in 2011. For a county trying to dig deep in the cupboard for revenue, there is still a lot of wasteful spending: stadium spending, park spending, and lots of extra fat in the police and education lines of the budget.”

The good news is that bankruptcy might actually give Jefferson County the opportunity it needs to reorganize its finances under court supervision, get the situation under control, and get back on its feet, said Mercatus economist and state and local budget expert Eileen Norcross. However, this will make it more expensive for it to issue debt for other important projects, not unlike the consequences for failing to pay off your credit card.

“It’s unclear what Jefferson County’s full options are just yet. Vallejo, California, raised taxes and cut spending so that they could continue paying out reduced pension benefits. Raising taxes further is not a realistic option in Central Falls, Rhode Island, so the suggestion is being made that pension benefits get cut,” said Norcross. “It's likely Jefferson will also try a bit of both: raising revenues and cutting spending.”