Brink Of Broke

Background:

FORTUNE -- Several downtrodden cities are on the verge of defaulting on their debt, putting financially encumbered states and taxpayers on the hook to pick up the tab. The National League of Cities says municipal governments will probably come up $56 billion to $83 billion short between now and 2012. That's the tab for decades of binge spending; municipal defaults could be our collective hangover.

Jefferson County, Alabama:

Jefferson County, Alabama's most populous county, with some 665,000 residents, is shouldering about $5 billion of debt, most of which was issued to overhaul its sewer system in the mid-1990s. But the county's real troubles stem from a 2003 refinancing of the original fixed-rate bonds and a corrupt local government that accepted kickbacks in exchange for mangling the county's portfolio.

Harrisburg, Pennsylvania:

Pennsylvania's capital owes $68 million in bond interest payments this year -- $3 million or so more than its entire annual budget. The Harrisburg Authority, the governing body that issued the bonds to construct a state-of-the-art trash incinerator, has already been unable to make several payments, and now the county government, which footed the bill last year for a $775,000 swap fee, is suing for the funds.

And of course, my favorite, Detroit, Michigan:

To make up for a 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The issuance followed on the heels of a warning from city officials that if its financial state didn't improve, it could be forced to declare bankruptcy. Nonetheless, demand for the bonds was high, thanks in large part to a guarantee that the state would make the payments if the city became insolvent. Michigan has already proved that it has few qualms about stepping in. In early 2009 the state took over the Detroit Public School System, which was facing a budget deficit of more than $300 million. Now a governor-appointed "emergency financial manager" oversees every penny spent.

Detroit has become a joke, which is sad because it was once a great American city. I can't imagine what has happened to those other two cities. It's not a good situation when cities are on the verge of bankruptcy.