Will Your State Undergo Bankruptcy Over COVID?
If you didn’t know, states are broke. Just for example, Arizona expects to have a $1.1 billion budget shortfall, Illinois $4.6 billion, Pennsylvania $3.9 billion, New York, perhaps as much as $7 billion. And honestly, I think these estimates are low, I do.
And you have to remember, the federal government can have a budget deficit, and that’s fine, but states can’t, except for Vermont. So other than Vermont, the states have to balance their budget.
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Anyway yesterday, the National State Governors Association, and specifically its chairman Larry Hogan, governor of Maryland, and its Vice Chairman Andrew Cuomo, governor of New York, sent a letter to Congressional leaders stating that due to the stay-at-home orders and the closing of non-essential businesses, “national and local economies are in dire straits resulting in the most dramatic contraction in the U.S. economy since World War II,” and they go on to basically beg for half a trillion dollars from the federal government in direct federal aid to states to replace their lost revenue.
Here’s the kind of stuff they’re asking for:
- Increased Medicaid funding
- More PPE, personal protective equipment and medical supplies such as test kits, ventilators, and related supplies, throughout the duration of the crisis
- Federal funds to replenish state unemployment trust funds, many of which have basically gone bust in the wake of this crisis
- Increase to the SNAP, or food stamps program
- More funding for K-12 and higher education
- Funding for any emergency work necessary
- And of course infrastructure funding because states are saying times are so tough right now they can’t afford to maintain utilities, highways, transit systems, etc.
Now, why did they send this letter? It’s because they didn’t get what they wanted in the $484 billion relief bill that was passed by the Senate yesterday.
The history of this interim relief bill in a nutshell: PPP, Paycheck Protection Program, forgivable loans for small business, went bust, no more money, Republicans said, let’s throw more money at PPP through this new bill, Democrats say, OK but we gotta throw some money in there for hospitals and state and local governments.
Democrats got the hospitals thrown in there in the Senate bill that was signed yesterday, but ol’ Mitch, Senate Majority Leader Mitch McConnel, didn’t let state and local governments get a piece of the pie.
But Pelosi’s not giving up on the states, she said that she wants the next, yet-undrafted stimulus package to include massive funding for state and local governments.
Mitch, of course, has said that he doesn’t want to rush federal relief to the states and would rather discuss it when Senate is back in session, starting May 4.
Oh, and also he’s totally cool with states going bankrupt.
He said yesterday, “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.”
And I mean, Mitch has a point, some states are in worse positions than others, much of which is due to reckless spending, unnecessary services, high public employee pension costs, and high-speed rail — you’ll get that joke if you’re from California — so why should the federal government i.e. we the national taxpayers, on a national level, bail out these stupid, irresponsible states?
Why not just let the states take responsibility for their sky-high spending and bloat over the years?
Only problem? States can’t declare bankruptcy constitutionally, they can tax their residents to death, but they can’t declare bankruptcy, and even if they could, it would probably be a pretty tough go for a state to convince a bankruptcy court that it can’t pay its debts because it has the power to tax.
But, if states could declare bankruptcy, what would happen?
First, assuming that the state is in fact insolvent — that is, it cannot make future debt payments or has already defaulted on its payments — and that the state has already attempted to negotiate with its creditors and that the state has convinced a federal judge to approve the bankruptcy despite its taxation power, the state would have to put together a plan to pay back its creditors as best it can and then its remaining debts would be discharged.
Taxes would go up, services would be cut, public pensions would be reduced, and it would be very painful for many of that state’s residents as well as its infrastructure.
But potentially at the end of the day, going through bankruptcy could cut a lot of fat and non-essential services, and the state just might come out leaner on the other side.
But on the other hand, it would be painful, and even necessary programs like state police and educational systems could suffer, limiting opportunity for the next generation.
The last time state bankruptcy was seriously considered was in 2011 when former Speaker of the House Newt Gingrich and former Florida governor Jeb Bush co-wrote an op-ed in the Los Angeles Times supporting state bankruptcy called “Better Off Bankrupt.”
I will leave the link in the description if you want to check that out.
So what do you think?
Should the federal government pass a bill to bail out the states who are facing a revenue crunch thanks to coronavirus, as the states have requested, which would mean we and the next generation collectively, as a nation, pay for these states’ woes, even though obviously larger states with more bloat like California where I live would likely get the lion’s share of such a bailout, while residents of more fiscally responsible states would likely get less direct benefit from such a plan?
Or, as Mitch says, should we just let states go bankrupt? They made their bed with their fat pensions and their reckless spending, let them lie in it.
But of course, one could argue that in the current situation, with a global pandemic, this really isn’t the states’ fault any more than it was your fault that you got laid off recently due to COVID, and yet you’re essentially getting a federal “bailout” through the extra $600 a week if your state has gotten on board yet, and I know there are still a few that haven’t.
I mean, no one — not you or me or the states we live in — could have predicted this pandemic, right?
But I want to know what you think: should the feds bail out struggling states, or should we let states go bankrupt?