How far should the federal government go in helping cash-strapped states and territories remain solvent during the greatest pandemic any of us have ever seen? Officials in Connecticut are eager to find out after U.S. Senate Majority Leader Mitch McConnell recently suggested states file for bankruptcy rather than receive another round of stimulus funding from the federal government.
It’s a fair question whether the federal government should take on yet more debt to help states. Even before the pandemic wrought economic devastation on the world, the federal government under President Trump and a GOP Congress was racking up record debt and deficits, thus giving the lie to the notion that “fiscally conservative” Republicans actually care about such things when they’re in charge.
The National Governors Association has asked Congress for $500 billion more in federal aid. The original COVID-19 relief bill contained $150 billion in aid to states as part of a larger $2.2 trillion package.
But McConnell’s suggestion has a number of problems. First of all, current law does not allow states to declare bankruptcy. So Congress would have to pass legislation allowing them to do so, and it’s difficult to see how such a bill would get through both houses. In addition, some analysts think allowing state bankruptcies would actually be unconstitutional and subject to multiple court challenges that could take years to resolve.
Furthermore, as a matter of policy, allowing states to file for bankruptcy is dubious at best. New York Gov. Andrew Cuomo called it “one of the really dumb ideas of all time.” Republican Gov. Larry Hogan of Maryland added, “The last thing we need in the middle of an economic crisis is to have states filing for bankruptcy all across America and not able to provide services to people who desperately need them.”
For his part, Gov. Ned Lamont suggested McConnell was having a plutocratic moment: “Marie Antoinette said let them eat cake. Mitch McConnell said let them file for bankruptcy.” A columnist for Governing, a magazine that covers trends in state and local government, called McConnell’s idea “crazy” because it conflates pandemic-related budget problems with public pensions.
That said, I do agree with McConnell’s concerns about how states would spend the money. The relief packages should be deployed specifically as a remedy for revenue shortfalls brought on by the COVID-19 pandemic and related expenses.
The funds should not be used to address prior mismanagement or systemic problems that existed before the mandatory shutdowns, such as unfunded state-employee pension liabilities, previous debt accumulation or structural deficiencies in state tax codes. The state of Connecticut itself bailed out the city of Hartford to the tune of more than half-billion dollars in accumulated debt, so perhaps we don’t set the best example ourselves.
But I digress. So what exactly are the implications for Connecticut? There is no doubt that we will have enormous revenue losses that will need to be addressed through increased taxes or spending cuts, or both. The state is expected to lose at least $2 billion in revenue over the next two years.
Most retail activity has declined precipitously and so has the state’s sales tax revenue. Gasoline consumption has plummeted as people shelter at home. Home heating oil consumption has consequently increased but heating oil is not taxed at nearly the same level that gasoline is. Groceries have been selling like hotcakes as people engage in panic buying, but non-prepared food purchased in grocery stores is exempt from the sales tax.
The state’s two tribal casinos have been closed since mid-March, depriving the state of millions from a slot-machine revenue-sharing agreement dating back almost 30 years. Even after they reopen, there is no telling how long it will take the casinos to recover.
And we won’t even know about the impact of income-tax revenue losses because the April 15 filing deadline has been extended to July. The result is a projected $500 million deficit in the current fiscal year, with much more in the out years.
Letting states file for bankruptcy as a result of the pandemic would stiff creditors, bondholders, and the retirees whose livelihoods in their twilight years would surely be at risk in any bankruptcy proceeding. We’ll all be facing inevitable tax increases and cuts in programs to service debt that’s growing exponentially. And the devastation ought to be paid for honestly.
Contributing op-ed columnist Terry Cowgill lives in Lakeville, blogs at CTDevilsAdvocate.com and is managing editor of The Berkshire Edge in Great Barrington, Mass. Follow him on Twitter @terrycowgill or email him at tcowgill90@wesleyan.edu.
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