In the latest economic aid package to clear Congress, Democratic leaders got quite a bit of what they wanted, including significant federal investments in hospitals, but there was one top priority on which Republicans wouldn't budge. House Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Chuck Schumer (D-N.Y.) fought for increased aid to cash-strapped state and municipal governments, but GOP leaders rejected the idea out of hand.
As the negotiations take shape for the next aid package -- what many refer to as "Phase IV" -- Republicans are once again arguing that state aid is a non-starter. Senate Majority Leader Mitch McConnell (R-Ky.) last week argued he'd prefer to see states with fiscal crises declare bankruptcy.
At a press briefing last week, New York Gov. Andrew Cuomo (D) questioned the "morality," "absurdity," and "meanness" of the GOP leader's approach, adding that as a legal matter, it would be up to Congress to give states the authority to declare bankruptcy. Cuomo then challenged the Senate Republican leader to seriously pursue his own proposal.
"It's your suggestion, Senator McConnell? Pass the law; I dare you. And then go to the president and say, 'Sign this bill allowing states to declare bankruptcy.' You want to send a signal to the markets that this nation is in real trouble? You want to send an international message that the economy is in turmoil? Do that. Allow states to declare bankruptcy legally because you passed the bill. It will be the first time in our nation's history that that happened. I dare you to do that. And then we'll see how many states actually take you up on it."
New Jersey Gov. Phil Murphy (D) added, "Really? This is the time in a moment of crisis unlike any our country has face in at least 100 years to suggest it's a good thing for states to go bankrupt?" Gov. Murphy said. "Come on, man. That is completely and utterly and irresponsible."
This is quickly shaping up to be one of the most important political fights of the season, so let's take a dive into the debate with a Q&A.
Is Cuomo right about existing law?
By all appearances, yes. Most legal scholars agree that states can default on their debts -- there are even some historical precedents for this -- but they lack the authority to declare bankruptcy. It would require new statutory powers, which Congress would have to approve.
Is it likely McConnell will seriously push such a proposal?
He might try, but if so, he'd almost certainly fail. There's no real political appetite for such a radical move, and the odds of such a measure passing the Democratic-led House are poor.
So if the bankruptcy option isn't going to work out, Congress will have to rescue states with a round of economic aid, right?
That would make sense, but McConnell and several other prominent Republicans are insisting that they have no intention of making the necessary investments, even as Democrats push for the aid.
And what would happen if Congress fails to help?
Nothing good. As we've discussed, state and local governments are facing catastrophic conditions -- not because of mismanagement on their part, but because of the pandemic. The more Republicans at the federal level resist throwing states and municipalities a lifeline, the more states -- which cannot legally run deficits -- will have to slash public services and public-sector jobs, even as the White House expects them to take the lead on a variety of critical fronts. This would, among other things, push the tragically high unemployment rate even higher, as states find it necessary to lay off school teachers, fire fighters, police officers, etc. We'd also likely see states canceling private-sector contracts, making the larger economic downturn worse.
That sounds bad. Maybe opening the door to state bankruptcy would be a better option?
It really wouldn't. As an analysis on municipal debt from the Center on Budget and Policy Priorities explained, "[A]llowing states to declare bankruptcy -- an idea panned across the political spectrum in the past -- could significantly raise states' cost of issuing bonds to pay for major transportation projects and other investments that boost the economy. That's because investors, worrying more that they might not be repaid, would demand higher interest payments."
New York's Josh Barro added yesterday, "[E]ven if we did allow states to declare bankruptcy, it wouldn't be an applicable tool for the fiscal crisis state governments are just starting to find themselves in."
So why is McConnell endorsing this?
The Republicans' Senate leader suggested last week that states are facing fiscal crises because of pension obligations to public-sector workers -- and it's no secret that the GOP is less than fond of public-sector unions. Sen. Marsha Blackburn (R-Tenn.) published a related tweet last week arguing, "[New York] and other left wing states have been ... kowtowing to labor unions by approving generous taxpayer funded benefits in exchange for votes has left them with billion dollar shortfalls."
Mother Jones' Kevin Drum added, by way of an explanation of the larger dynamic, "[A]s far as McConnell is concerned, COVID-19 has an upside: by wrecking state finances, it will force them into bankruptcy. And that means Republicans can get their revenge on public sector unions, who are big supporters of Democrats."
Is there anything to the GOP argument?
Don't be fooled: states and municipalities are facing fiscal crises because of lost tax revenue and enormous fiscal pressures generated by the pandemic. Pension policy is an important issue in general, but it's not why so many governors are looking to Capitol Hill for emergency assistance.
Does McConnell have any allies?
Sen. Pat Toomey (R-Pa.) was one of the few members to say he's "open to the idea of allowing state bankruptcy" as McConnell suggested. Blackburn's tweet suggested she's at least nominally on McConnell's side, too.
Sen. Tom Cotton (R-Ark.), meanwhile, hasn't explicitly endorsed the Kentucky Republican's state-bankruptcy plan, but he did argue last week that he's strongly opposed to increased federal aid to states. Former U.N. Ambassador Nikki Haley pushed a similar line, condemning "poorly run states" that are facing fiscal crises. (She's wrong about why states are struggling.)
It sounds like we're dealing with another predictable Democratic-vs-Republicans partisan split.
Not so fast. Maryland Gov. Larry Hogan (R), the current chairman of the National Governors Association, said last week that McConnell's posture is "complete nonsense," while Rep. Peter King (R-N.Y.) described the Senate GOP leader's position as "shameful and indefensible." What's more, Sen. Bill Cassidy (R-La.), to his credit, is co-sponsoring a bipartisan $500 billion rescue package for state and municipal governments.
Also keep an eye on vulnerable Senate Republicans up for re-election this year. Members such as Maine's Susan Collins, Arizona's Martha McSally, Colorado's Cory Gardner, and North Carolina's Thom Tillis, among others, probably don't want to tell their constituents in the fall, "Our states are falling apart and laying off thousands, and it's only possible because my party enjoys a Senate majority."
Steve, you're slipping. This Q&A hasn't mentioned Donald Trump once.
That's because the president's position has grown quite murky. Early last week, Trump made several seemingly unambiguous statements in support of federal aid to states, positioning the White House on the opposite of the Senate Republican leadership. On Thursday, however, the president seemed to turn 180 degrees, backing away from his earlier commitments, and suggesting "the plague" isn't fully to blame for "blue" states with fiscal problems.
Given the multi-intersectional dispute, it's tempting to think the president -- or at least, a president -- could play a constructive leadership role in a situation like this, but Trump doesn't appear to know much about the issue, and there's no reason to expect him to get up to speed anytime soon.
So what now?
Negotiations on the next possible aid package haven't yet begun in earnest, and Nancy Pelosi will apparently be taking the lead in negotiating for her party. With that in mind, it's worth noting that the House Speaker has said state aid is an absolute necessity for the next bill. Period, full stop. McConnell, obviously, disagrees, setting the stage for a serious clash.
Meanwhile, Kevin Hassett, a senior economic policy adviser in the White House, told ABC News' George Stephanopoulos yesterday that federal policymakers are "probably" going to have to help states. (On state bankruptcies, Hassett added, "I didn't see the clip from Senator McConnell, but I'm not sure exactly what he was talking about.")
Any wild cards?
Keep an eye on Treasury Secretary Steven Mnuchin, who's been more willing than most Republicans to cut meaningful deals with Democrats, and who's already signaled his support for state aid in a Phase IV bill. Remember, folks like Pelosi and Schumer don't negotiate with Trump directly -- he's not engaged enough to be involved, his vaunted deal-making skills notwithstanding -- they sit down with Mnuchin.
What happens if Pelosi and Mnuchin work out an agreement that can pass the House, but which McConnell doesn't like? It's hard to say with confidence, but the Senate GOP leader has been on a legislative losing streak lately, and it wouldn't shock me if it continued.