Sunday, November 20, 2011

Jamaica: Lessons From A Bankrupt US City

jamaica-gleaner editorial

In recent days, potential buyers have been rummaging through boxes of Wild West artefacts in a large, old building in the city of Harrisburg in the American state of Pennsylvania.

The pieces were collected for the establishment of a museum, but they are to be auctioned off to help pay the city's debt. Last month, Harrisburg, the Pennsylvanian capital, filed for bankruptcy, the legitimacy of which a court will rule on this week.

In the meantime, the state government has sent in a receiver to organise a workout plan for the city and to put its finances in order.

Harrisburg is not the only insolvent municipality that has filed for bankruptcy. Last week, Jefferson County, in Alabama, did so, saying it was unable to service a US$4-billion debt. In August, Central Falls in Rhode Island also sought protection from creditors.

Cities can, and do, go bankrupt. And if it happens to cities, it can happen to the nation states of which they are part.

Indeed, that is what Greece and Italy barely escaped and are still fighting to stave off, causing the collapse of their governments, in favour of interim administrations in whose ability to take on tough reforms creditors have greater confidence. If the numbers behind the debt and fiscal crisis of Europe's PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are difficult to digest in Jamaica, perhaps the developments in the United States (US) cities will help bring clarity to the danger with which Jamaica flirts by the failure to vigorously confront its own debt crisis.

genesis of the problem

The genesis of the problem in Europe, the US municipalities and Jamaica are, essentially, the same. They borrowed heavily to fund services or projects which have not, for a variety of reasons, returned enough to service their debts. In the case of Harrisburg, the overall debt is around $500 million, but the bulk of it is owed on a trash-to-energy facility that has not performed to expectation.

But the city, under its former long-serving mayor Stephen Reed, had a history of going to the market to finance projects. "He (Reed) never met a bond he didn't like," quipped Harrisburg's controller, Dan Miller.

That sounds like a Jamaican affliction. Our cane, the debt, not counting yet-unaccounted-for off-book obligations, is $1.6 trillion, or 130 per cent of GDP. Servicing the debt, including amortisation, takes up three-quarters of income from taxes and grants. What is left over is sufficient to pay only a third of public-sector wages. So, the country finds itself on a treadmill of debt.

In Jefferson County, roughly analogous to a Jamaican parish, municipal officials, in the face of the fiscal crisis, have laid off workers, cut hours and raised sewerage charges, the debt for which is a major source of the problem. Pensions may not escape.

The options faced by Jamaica are essentially the same, as the International Monetary Fund has been telling our Government. The public sector has to be reformed, including cutting jobs and overhauling its largely non-contributory, and unaffordable, pension scheme. The tax system has to be restructured to make it more efficient and to bring more people in its purview.

Political leaders talk about these things, but move on them with little energy, making a threatened debt downgrade more likely, which would increase the cost of borrowing. Which might we prefer: Greece, or Harrisburg?

November 20, 2011

jamaica-gleaner editorial