McConnell...Illinois should file for bankruptcy!

Senate Majority Leader Mitch McConnell said Wednesday he favors allowing states struggling with high public employee pension costs amid the burdens of the pandemic response to declare bankruptcy rather than giving them a federal bailout.

© Mitch McConnell

“I would certainly be in favor of allowing states to use the bankruptcy route,” he said Wednesday in a response to a question on the syndicated Hugh Hewitt radio show. “It’s saved some cities, and there’s no good reason for it not to be available.”

The host cited California, Illinois and Connecticut as states that had given too much to public employee unions, and McConnell said he was reluctant to take on more debt for any rescue.

“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”

His statements set up a conflict with House Speaker Nancy Pelosi, who said on Bloomberg Television Wednesday a “major package” of aid for state and local government will be in the next stimulus legislation considered by Congress.

McConnell may also find himself in conflict with President Donald Trump. The president said Tuesday after meeting with New York Governor Andrew Cuomo that states will need assistance. “And I think most Republicans agree too, and Democrats,” Trump said. “And that’s part of phase four.”

McConnell, a Kentucky Republican, noted he blocked additional state and local aid in the latest relief package, which passed the Senate Tuesday and is set for a vote Thursday in the House.

“I said yesterday we’re going to push the pause button here, because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated,” McConnell added.

The idea of allowing states to file for bankruptcy was raised in the wake of the last recession. It drew widespread disdain from Wall Street investors, public employee unions and both Republican and Democratic governors, who said it would unsettle the bond market and cause even the most fiscally sound states to face higher interest rates because of the risk the debt could be wiped out in court.

It was also criticized by U.S. lawmakers of both parties during a House hearing that was convened to discuss it in 2011 and was swiftly dropped.

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The National Governors Association has said states and municipalities will need at least $500 billion in aid to deal with the crisis caused by the coronavirus pandemic as tax revenue falls and demands for resources escalate.

McConnell said there should be a “fulsome” discussion among all Republican senators on whether and how to send more aid to state and local governments and what that money should be spent on.

That will be one of the focuses for the next round of stimulus spending that Congress will be taking up, and McConnell’s reluctance signals that negotiation could be the most difficult one so far. President Donald Trump said Tuesday that he expected aid to state and local governments would be part of that.

No state has defaulted on its debts since the Great Depression and even after the last recession only a handful of cities went bankrupt, since governments have broad ability to raise taxes.

The current economic contraction may leave states facing an even worse fiscal crisis than they did a decade ago, which has prompted growing calls from the nation’s states and cites for Congress to provide aid to help them make up for the taxes lost by the nationwide shutdown. Governors have requested $500 billion and cities and counties $250 billion.

The bond market, however, doesn’t appear to be pricing in much risk of defaults. While prices tumbled during a panicked sell-off last month, they’ve since rebounded, with returns roughly flat for the year.

This is going to happen sooner than you think. Will be followed by a host of municipalties and counties.