This story from CNN talks about a radio interview Mitch McConnell had with Hugh Hewitt today. (The thread title was the headline on the CNN story.) McConnell said, “I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there’s no good reason for it not to be available. My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of.” (Some have suggested that the current round of pandemic-related spending should include money for states and cities that have spent a lot as a result.)
I’ll be honest; the idea of a whole state declaring bankruptcy seems crazy to me. Googling, I learn that some actually did this, although it was 180 years ago. Are some state finances so bad that this is a possibility? If so, which states or cities are in the worst shape? (McConnell’s comments seem to suggest that he thinks it’s Democratic states.)
At the same time, I’m a little amazed that the federal government (with a Republican in the White House and Republicans firmly in control in the Senate) signed off on at least $2.5 trillion in pandemic-related spending.
The fact that Hugh Hewitt is president and CEO of the Richard M. Nixon Foundation tells you everything you need to know about him.
McConnell wants states to go into bankruptcy because despite the supposed conservative principles of “states’ rights” he wants states beholden to Congress. By getting more control over the states a Republican-controlled Congress can entrench their positions on various issues from abortion rights and birth control to religious charter schools and gerrymandering. He’s not shy about his motives, either. However, the states most likely to have to declare bankruptcy or other measures are going to be the ones already hurting from loss of industries and damage to the agricultural sector from Trump’s immigration policies and “trade war“ with China, which BTW we still haven’t won despite his promise that “Trade wars are easy to win.”
My impression is that McConnell was mainly talking about states with underfunded pension systems; he doesn’t want federal relief money used to shore up pensions. I’m guessing that if there’s another relief bill intended to address state budget shortfalls, it won’t include any money for pension debt.
The idea that allowing states to declare bankruptcy will magically make pension debt go away strikes me as fanciful. I don’t know about other states, but Illinois has a clause in the state constitution that prohibits the state from reducing pensions. The state legislature has tried to get around this with creative (i.e., stupid) legal arguments, only to get blocked every time by the state Supreme Court. States already have broad powers to raise revenue via taxes, which militates against them saying “Sorry, we’re broke and there’s nothing we can do about it.”
What leverage does the federal government gain over a state government if they go bankrupt? In Michigan I believe the state took control of several local governments due to financial issues, I’m not sure what the federal government legally can do.
Can they take over state governments and demand they make cuts to education, health care, infrastructure, etc? What about non-economic issues like abortion, charter schools, drug decriminalization, etc can they enforce non-economic issues in a bankrupt state?
Certain issues like drug decriminalization raise tax revenue rather than cost it. Legal marijuana raises taxes and it saves tax money via less spending on law enforcement and prisons. Is there a constitutional argument for the federal government doing something like overruling legal marijuana in a bankrupt state?
The bond market is, IMHO, the primary reason state bankruptcy won’t get to square one. Who in their right mind would buy state bonds knowing that the state could just say, “We’re bankrupt! BOOM! Suck it, bondholders!” States might be willing to screw over their retirees, but they don’t want to see their bond ratings tank.
Illinois didn’t pay its bills for two years because of a political tiff. The thing that finally scared them into action? Moody’s was threatening to lower the state’s rating to “junk.”
McConnell hasn’t thought through any of the issues raised in this thread. He’s talking out of his ass.
Andrew Cuomo pointed out that Mitch McConnell’s state of Kentucky is one that takes more in federal funds than it contributes in tax revenues, while NYS contributes more than it takes. And this statement by McConnell, “My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that,” would play better if the federal budget was actually balanced, and not an endless series of deficits. Because it sounds like he’s saying, it’s OK for the feds to overspend, but we’re not going to help the states.
Bankruptcies mean the little guys owed money get screwed over. McConnell doesn’t want his rich masters to pay some of the bill through higher taxes if the government bails out the localities. I can understand why he made that choice since he’s previously opted for moral bankruptcy for himself.
Regardless of the merits of this position, it would not be a state law impairing the obligation of contracts, it would be a federal law permitting states to get out of their contracts through a federal procedure overseen by a federal bankruptcy trustee and judge, no different than when an individual declares bankruptcy.
One wouldn’t say that an individual has passed his own personal law impairing his own contracts, so why would the states be accused of doing so?
Although it does call into question some basic bankruptcy principles. I can say I can’t pay my bills because I can only get a job at Subway making minimum wage. The states have a near unlimited power to raise money and this would put federal judges and trustees in the position of attempting to order states to raise taxes or cut spending: something wholly undemocratic.
Which ISTM is part of the matter: the states are constitutionally sovereign. They are not wards or creatures of the Federal Government.
In the case of non-sovereign federal subjects, DC and Puerto Rico got one form or another of Fiscal Oversight Board put on top of them to force the District/Commonwealth government to bite the bullet and do the reforms and restructuring *without *it being a bankruptcy discharge. Our Fical Oversight Board CAN rewrite the state budget; the Judge for the restructuring cases CAN sign off on a settlement that commits to raising taxes or user fees, sell state assets or to cut social services and benefits. Find me a state who’d take that sitting down.
Title IX allows for the bankruptcy of a chartered entity created by the state’s laws (a municipality, a transit authority, a college) and in the worst case scenario the state that chartered it can dissolve it and take over what’s left after it’s sold for parts. Who can dissolve and take over a state?
Which brings me to
Heck, part of the problem was we don’t even have Title IX for sub-entities (we were excluded in 1984, nobody has ever provided a good explanation), we would have settled for just that back in 2012. But yes, in our case, making sure there would be no possible “contagion” for the states was very, very pointendly and deliberately brought up as an absolute requirement in passing the PROMESA law in 2016. The debate was essentially several days of reiterating “this is not a bailout, the US Taxpayer/Federal Reserve is not going to assume one dollar of this, bondholders will be paid”. Because they knew the congressmen and senators of every state with a failing pension fund would be lining right outside the door otherwise.
It’s simple! State governments should be run like businesses, and should be allowed to fail if they don’t plan for circumstances like these. But we need to open our national wallet to big businesses because they can’t be allowed to fail.
And it’s an attempt to reduce government staffs and reduce federal spending that goes through the states (Medicaid, Unemployment, etc). It’s probably McConnell’s attempt to throw pension systems into a mass grave, too.
Pensions are one of the top investing groups in the country. Without pensions, the market would drop significantly. Bonds, too, would have to become more expensive to offer - higher interest rates, more fees - without pension buyers.
Pension funds would be fine as long as they never had to pay out any money to (ewww…) ordinary schmucks who worked for a living and expect to go on living after their working days are over. A fund that money goes into is a good thing. As long as money never goes out. Get the picture?
But pension funds are annoying investors. They bring enough capital to the table in one big lump so they can make demands on the businesses they invest in – like oust underperforming management.
Large enterprises would prefer the same investment, but split into 100000 401ks where no individual investor can do anything but invest and hope.
It’s just culture war nonsense. It’s why McConnell is also making comments about not bailing out the pension systems of “blue states.” He’s hoping to make it look like attempts to shore up state finances are helping out those people at the expense of us. It doesn’t look like it’s working, at least not yet.