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States, localities plead for COVID money, but McConnell says no

Majority leader says bankruptcy is option for states

Rep. Peter King, R-N.Y, called McConnell "the Marie Antoinette of the Senate" for suggesting states consider bankruptcy if they can't manage the costs of the COVID-19 pandemic.
Rep. Peter King, R-N.Y, called McConnell "the Marie Antoinette of the Senate" for suggesting states consider bankruptcy if they can't manage the costs of the COVID-19 pandemic. (Bill Clark/CQ Roll Call)

As House members return to Washington to vote on a $483.4 billion interim COVID-19 aid bill Thursday, state and local governments say their budgets can’t wait much longer for federal relief.

Despite initial Democratic efforts to include $150 billion for states, the package the Senate passed Tuesday didn’t include funding for budgets ravaged by the economic shutdown caused by the coronavirus pandemic.

“We’re incredibly disappointed that we were left behind and that we were asked to wait till the next package,” Matthew Chase, executive director of the National Association of Counties (NACo), said on a press call Wednesday.

While Congress has given states and localities extra funds to fight the virus and soften the economic blow, it hasn’t helped them deal with cratering tax revenue. Governors and mayors across the country are warning that budgets will need to be slashed without federal intervention, which would mean putting thousands of teachers, police, emergency medical technicians and other public employees out of work.

As attention turns to the next spending package — one expected to be aimed at boosting the country’s economic recovery after the health crisis is under control — some prominent Republicans say state and local budgets should be left out.

Speaking on Hugh Hewitt’s radio show Wednesday, Senate Majority Leader Mitch McConnell, R-Ky., said he didn’t want Congress to come to states’ fiscal rescue.

“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,” McConnell said. “That’s not something I’m going to be in favor of.”

He said the states truly struggling should opt for bankruptcy.

Rep. Peter T. King, R-N.Y., rejected McConnell’s approach.

“McConnell’s dismissive remark that States devastated by Coronavirus should go bankrupt rather than get the federal assistance they need and deserve is shameful and indefensible. To say that it is ‘free money’ to provide funds for … cops, firefighters and healthcare workers makes McConnell the Marie Antoinette of the Senate,” King said on Twitter.

Some in the GOP are working on legislation to help state and local governments. On Monday, Louisiana Republican Sen. Bill Cassidy and New Jersey Democratic Sen. Bob Menendez unveiled a proposal calling for $500 billion to help local governments. The pair hope their provision will make it into the next coronavirus relief package.

McConnell said debate on that could begin once Congress returns, adding that he sees nothing preventing the Senate from doing so as scheduled on May 4.

Dire straits for budgets

On Tuesday, freshman Rep. Jason Crow, D-Colo., and the Republican he beat in 2018, Mike Coffman, wrote an op-ed in The Denver Post urging Congress to provide “stimulus relief to our state and local governments who are on the front lines of this pandemic.”

They pointed to a projected $3 billion shortfall in Colorado’s state budget and a $25 million budget cut facing Aurora, where Coffman is now mayor.

Colorado’s budget woes are not uncommon.

NACo estimates that county budgets will be short $144 billion because of COVID-19. Along with the National League of Cities and the U.S. Conference of Mayors, NACo has requested $250 billion in funding assistance for local governments.

Chase said the funding is critical to keeping the 3.6 million Americans who work for county-level governments employed during the severe economic downturn that has already cost more than 26 million jobs. “We have 315,000 hospital workers — doctors, nurses and other folks,” Chase said. “We’ve got 363,000 sheriffs, police, EMTs.”

The National Association of Governors also has asked Congress for $500 billion to help states handle the huge fiscal challenges imposed by the pandemic. And last week, the governors of Pennsylvania, Michigan and Wisconsin — all key swing states in 2020 — sent a letter to President Donald Trump urging him to work with Congress to provide more funds. The governors projected budget shortfalls of $3 billion in Michigan, $2 billion in Wisconsin and $4.5 billion in Pennsylvania.

While the three coronavirus response bills (PL 116-123, PL 116-127 and PL 116-136) passed by Congress in March contained funding for states and localities, a lot of it was earmarked for new public health spending and backing up unemployment insurance funds. The largest pile of funds — $150 billion provided in the third package — is restricted to new expenses not included in prior budgets.

That means the cities and counties that prepared for public health crises before coronavirus were left out, said Stan Veuger, a resident scholar at the conservative American Enterprise Institute. “You’re basically rewarding people for bad planning,” he said.

While states could reallocate their shares to counties and cities, that would still leave gaps, said NACo’s chief economist Teryn Zmuda.

“Nearly 90 percent of counties indicate that COVID-19 is currently straining their county budget, which includes counties of all sizes,” she said. “More than half of counties have indicated that they have already lost revenue, and 95 percent have indicated that they anticipate further revenue loss related to COVID-19.”

The Federal Reserve is also standing up a lending facility to buy state and municipal bonds, but access to that facility will be limited to cities with more than 500,000 residents. Unlike the federal government, states and localities have limited borrowing ability. Even those with the best credit ratings can’t borrow as cheaply as the federal government. Most are constitutionally prohibited from running deficits, and bonds issued now will constrain budgets for years.

“State and local [governments] have tight constraints — they really have to cut spending when income falls,” said J.W. Mason, a fellow at the Roosevelt Institute and economics professor at John Jay College, University of New York. “When they do that, it hurts everyone that works for the state and everyone that does business with the state.”

“It means we’ll still be looking at a depression even after the immediate crisis is over,” he added. “So, if you don’t want the economy to go into a depression, you have to do something about state and local budgets.”

‘Every state has the same problem’

Some conservatives have argued that Congress has already done enough, and that bailing out states would reward the behavior of state legislatures that didn’t save for a downturn.

“Illinois had about 15 minutes’ worth of rainy-day revenue, whereas other states have an entire year’s worth of revenue,” said Rachel Greszler, a research fellow at the conservative Heritage Foundation. “So, bailing them out, and just saying we’re going to provide whatever funds you need to keep you whole, disproportionately benefits those states that have not done the right thing and have not acted in a fiscally responsible way, and … encourages that same type of bad behavior going forward.”

“That’s just, frankly, insane,” said Mason. “The disease that’s striking state and local budgets now has nothing to do with deficits in the past.”

Other conservative economists agree with Mason. “It’s obviously ridiculous,” said AEI’s Veuger. “The moral hazard argument is very bad in this situation.”

Some states asking for money now had maintained healthy budgets. While Illinois has chronically underfunded its pension obligations, Wisconsin had its funded at more than 100 percent heading into the crisis.

“Based on unemployment claims, it seems like every state has the same problem,” said Veuger, adding that he has heard concerns about Republicans opposed to a “blue-state bailout.”

“But I don’t get a sense that the red states are going to come out of this any better,” he said.

“Maybe there is someone who wants to say, ‘Let the country go into a depression to punish the irresponsible legislators in Illinois,’” Mason said. “The best way to turn a downturn into a depression is to let falls in income lead to falls in spending, which leads to more falls in income and more falls in spending.”

Greszler also argued that saving state budgets could delay reopening the economy. “If the federal government is going to cover all the shortfalls, they have the incentive to delay reopening as long as they want,” she said.

Other economists have argued that reopening businesses too soon, allowing the pandemic to return, would be worse for the economy in the long run.

Congress already made the mistake of not helping states out in the 2008-09 recession, said Mason.

“All the spending at the federal level was canceled out by the decline of spending at the state and local level,” he said. “I don’t think anybody is going to argue that experience improved the quality of budgeting, but what it did do was create that jobless recovery we experienced.”

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