The ink was barely dry on the Senate’s bill to provide an additional $484 billion of Covid-related economic relief when Mitch McConnell fired the first volley of the next battle. On April 21 he appeared on Fox News host Bill Hemmer’s show and said:
“What I’m saying is we’re going to take a pause here, we’re going to wait at least until May 4th which is the time we’re going to have everyone back in the Senate and clearly weigh, before we provide assistance to states and local governments, who would love for us to borrow money from future generations, to make sure that they have no revenue losses.
“Before we make that decision, we’re going to weigh the impact of what we’ve already added to the national debt and make sure that if we provide additional assistance for state and local governments, it’s only for coronavirus related, coronavirus related matters.
“We’re not interested in solving their pension problems for them, we’re not interested in rescuing them from bad decisions they’ve made in the past. We’re not going to let them take advantage of this pandemic to solve a lot of problems that they created for themselves, and bad decisions they made in the past.”
“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. You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs. There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
He went so far as to make the suggestion that in lieu of aid, states should consider bankruptcy:
“I would certainly be in favor of allowing states to use the bankruptcy route. It’s saved some cities, and there’s no good reason for it not to be available.”
Trump then jumped into the fray, playing both sides of the issue as usual. First he told New York’s Governor Cuomo that he was very open to federal budget aid to states, but several days later tweeted: “Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?” Apparently, conservative media played up the blue-state bailout angle enough to trigger his usual polarize-for-political profit instinct.
Perhaps the most odious comment came from Florida Senator Rick Scott, who said: “It’s not fair to the taxpayers of Florida. We sit here, we live within our means, and then New York, Illinois, California and other states don’t. And we’re supposed to go bail them out?” Considering that Scott’s Columbia/HCA private hospital chain, which he founded and ran, paid $1.7 billion in settlement fines for Medicare and other fraud, it’s a bit galling to hear him talking about what’s fair to taxpayers and what’s not. Moreover, New York State has the largest “balance of payments” deficit with the federal government while Florida has one of the largest surpluses (California and Illinois are roughly in balance).
Of course, the push back against this nonsense was swift. Cuomo slammed McConnell as “reckless” and “irresponsible,” Connecticut Senator Chris Murphy slammed Scott, and retiring Republican congressman Peter King called McConnell “the Marie Antoinette of the Senate.” Paul Krugman, Eric Levitz, and Paul Waldman piled on. Nancy Pelosi said flatly: “We will have state and local and we will have it in a very significant way.”
After making aid to state and local governments a central demand of their negotiations over the third COVID disaster relief bill, it was surprising and disappointing to many Democrats that Chuck Schumer and Pelosi agreed to a bill that included none. With pressure mounting to refund the small business relief program, the Democratic leadership apparently prioritized other demands, including financial aid to hospitals, aid to states and cities for coronavirus testing programs, and set-asides of small business loan program funds for small financial institutions and businesses, while betting that they could win a subsequent battle for state and local fiscal aid. Indeed, there appears to be significant Republican support for state and local aid, even if many Republican officials are laying low so as to not cross Trump and McConnell. In addition to Peter King, for example, Representative John Katko (R-NY) said that phase four had to protect state and local governments, and Republican Senator Bill Cassidy (R-LA) cosponsored a $500 billion aid bill with Democrat Bob Menendez (D-NJ).
The suggestion that states should consider bankruptcy is ludicrous. Aside from that federal bankruptcy law doesn’t currently provide for state bankruptcy and it may not be constitutional, states and cities have about $3 trillion in debt outstanding. Allowing public debt defaults to occur all over the country would be like asking the financial system to walk through a minefield on the path to economic recovery; in fact, the Fed is actively trying to prevent that kind of havoc in the muni bond markets.
Moreover, states and cities employ over 18 million people, of whom over 4 million are public school teachers or sworn law-enforcement officers. Nearly one-quarter of all construction spending in the country is conducted by state and local governments and agencies; nearly every mile of roadway is maintained by them and every mass transit system operated by them. There are over 50 million children enrolled in public elementary and secondary schools and 13 million enrolled in public colleges and universities. Why would the federal government want to see public services for so many Americans disrupted and the livelihoods of so many people imperiled due to a mass fiscal crisis of state and local governments? And how could the economic recovery from the COVID Recession proceed if state and local governments were forced to dramatically cut back their activities and payrolls?
Congress has already provided significant aid to state and local governments in the first two COVID relief laws. The Families First Coronavirus Relief Act provided a 6.2-percentage point boost in the federal medical assistance percentage (FMAP), which will deliver an additional $40 billion to states in calendar 2020 to offset their Medicaid expenses. The CARES Act provided another $180 billion to states, cities, territories and tribal governments; approximately $30 billion through an Education Stabilization Fund and another $150 billion through a Coronavirus Relief Fund. Monies provided through the Coronavirus Relief Fund, however, were limited to expenditures related to the public health emergency and cannot be used to compensate for revenue shortfalls for state or city functions that were previously budgeted. Consequently, there is some confusion as to what expenditures are permissible and some states are concerned that they will not be able to utilize all of the money allocated to them under the Act.
Although the relief already provided to state and local governments is substantial it represents a small part of the budget shortfalls those governments are likely to experience as a result of the economic shutdown and recession. I calculate that state governments had budgeted for over $1.5 trillion in revenues from their own sources in 2020 and local governments for about $1.2 trillion; the federal aid pledged so far amounts to about 8% of that, and those governments are likely to see a spike in health, hospital and other expenses as a result of the pandemic. The Center on Budget and Policy Priorities estimates that state governments alone will see budget shortfalls of $105 billion in their current fiscals years and of $290 billion and $105 billion in their 2021 and 2022 fiscal years. Local governments will likely see smaller drops in own-source revenues because of their greater reliance on property taxes, which are more stable than income and sales taxes, but the hit will still be substantial. Also, local governments get more than one-quarter of their total revenues from their respective states, which without additional federal aid will be forced to slash revenue sharing.
So given all this, is McConnell serious about bankrupting the states? I suspect the letter sent by Don Harmon, Senate President of the State of Illinois, to Illinois Senator Dick Durbin, ticked him off. Admittedly, Harmon’s aid request may have been a bit of an overreach, but who listens to Illinois state senators anyway? It’s a tell that McConnell mentioned state “pension programs” in his remarks to Hewitt. It’s been a long-term goal of modern Republicans to whittle down expansive state government, as is reflected in McConnell’s obsession with judicial appointments and his capping of the SALT deductions, and public employee unions and their pension plans have been a particular target, as Republicans see them as a bastion of Democratic political influence at the state level. McConnell might have been tipping off a negotiating strategy of crimping state pensions in return for federal aid. Another tell was his suggestion of bankruptcy as a fiscal course open to states; that hints of a legal maneuver to renege on public employee pension commitments.
After the universal ridicule McConnell’s comments provoked, he seemed to back off somewhat. In a Fox News appearance, he said: “There’s no question all governors, regardless of party, would like to have more money, I’m open to discussing that.” But he went on to link aid to states to liability protection for businesses, who he said could face an “avalanche” of lawsuits as they try to re-start their operations. Whether he has retreated to a less ambitious negotiating strategy or always had business (donor) interests foremost in his mind, he seems to be placing conditions on his willingness to do what nearly everybody of sound mind thinks needs to be done anyway. In that sense I agree with David Roberts at Vox: McConnell consistently negotiates as though doing the obvious right thing is magnanimous of him and is deserving of a legislative reward in return.
In the end I think McConnell will get his liability protection for businesses and the states and cities will get substantial fiscal relief. I don’t even think the Democrats will have to wait for Joe Biden to take office to get it. But already, the Republicans are positioning for that possibility, suddenly raising new concerns about the deficit and national debt. Until November McConnell and Senate Republicans will provide all the money they think necessary to get Trump reelected; should a Democrat inhabit the White House in 2021, however, the national debt will become a pressing problem once again.