Editorial: Letting state governments go bankrupt is a terrible idea

Congress has cranked the spigot of federal dollars wide open in response to the COVID-19 pandemic, first to improve the public health system’s response and then later to try to soften the blow to the U.S. economy. The amount of spending has been breathtaking: $3.6 trillion so far, which is about $140 billion more than the federal government collected in taxes, tariffs and other revenue in fiscal 2019.

But lawmakers are not done. Among the many needs still to be addressed is the huge gap that the pandemic and the subsequent stay-at-home orders have opened in state and local budgets. California’s Legislative Analyst Office estimated that the state could lose almost a quarter of its revenue in the coming fiscal year; other states are projecting double-digit shortfalls as well. The total loss could be close to half a trillion dollars, the Center on Budget and Policy Priorities estimated.

Because state and local governments are required to balance their budgets, the revenue losses caused by COVID-19 could force deep cuts in public education, public safety, utilities and other vital services. That why top congressional Democrats have been pushing to help cash-strapped state and local governments, and rightly so.

Republican leaders in Congress, however, have balked at the idea. “We’re not ready to just send a blank check down to states and local governments to spend any way they choose to,” Senate Majority Leader Mitch McConnell (R-Ky.) explained to conservative talk-show host Hugh Hewitt last week. “It has to be coronavirus-related. And I think we need to have a full debate not only about if we do state and local, how will they spend it.”

By all means, governments need to be accountable for what they do with tax dollars. But McConnell wasn’t concerned about waste, fraud and abuse; he was worried about states using the money to shore up their beleaguered public pension funds. Instead of Congress providing emergency aid,
McConnell told Hewitt, “I would certainly be in favor of allowing states to use the bankruptcy route.”

The liability faced by states and local governments for the retirement benefits they promised police, firefighters, teachers and other public employees is enormous indeed. But that’s a problem for the long term. The problem for this moment is the staggering revenue loss caused by the shutdowns that have helped keep the pandemic from overwhelming local healthcare systems. According to research by the Pew Charitable Trusts, nearly 70% of state revenues in fiscal 2018 came from sales and income taxes, the sources hit hardest by the sharp contraction in the economy. States and cities aren’t looking for ways to shore up their pension funds; they’re looking for ways to keep police and firefighters on the streets, educate their students remotely and provide other basic services.

Not only is McConnell focused on the wrong problem, he’s offering the wrong solution. Cities in almost half of the states aren’t allowed to declare bankruptcy, and federal law doesn’t give any states the authority to do so. Lifting those restrictions would be constitutionally dicey, and the problems states would cause by seeking bankruptcy protection — in particular, the years of costly damage it would inflict to their ability to negotiate contracts, sell bonds and borrow money — could overshadow any potential benefit. And besides, pension claims aren’t wiped out by bankruptcy; states would still have to negotiate with public employee unions over any reductions in benefits.

Conservatives have long floated the idea of state bankruptcies as a solution to the pension crisis; the coronavirus is merely a pretext for them to renew that effort now. Lawmakers should not be fooled, nor should they ignore the problems state and local governments are encountering in their drive to protect public health.