Senate Majority Leader Mitch McConnell (R-KY) recently said he is “in favor of allowing states to use the bankruptcy route,” instead of Congress providing them with federal funds during the COVID-19 crisis, because “many of them have done [this] to themselves with their pension programs.”
For the moment, leave aside the important facts that state bankruptcy is possibly unconstitutional, and that even if it were allowed states do not have access to bankruptcy protection under federal law (at least not yet).
My real objection is to McConnell’s claim that the states’ own reckless behaviors precipitated this fiscal crisis. That allegation is not only absurd, it’s incredibly dangerous. Because if Congress doesn’t step up and fiscally support the states now, the entire country will fall deeper into this unprecedented recession.
Here’s the real story: At the start of 2020, state finances were strong. Revenues were mostly coming in above expectations, and not one state had been forced to make a mid-year budget cut in fiscal year 2019. As a result, most states ended their two most recent fiscal years with budget surpluses, and many deposited excess money into their rainy day funds.
In fact, the median state rainy day fund reached an all-time high of 7.6 percent of general fund spending in fiscal year 2019. And, before the coronavirus hit, average fund balances were expected to grow to 8.0 percent of spending by the end of fiscal year 2020.
It’s also important to remember how hard states worked to get here over the past decade. The Great Recession obliterated state revenues and depleted their savings. In 2010, the median state rainy day fund was 1.6 percent of general spending. And fiscal year 2019 was the first year that inflation-adjusted state general fund spending surpassed its pre-recession peak from fiscal year 2008.
Of course, the size of rainy day funds varies considerably—California’s is good; Pennsylvania’s is not so great. But the upshot is that after years of economic growth and careful fiscal planning, most states were well prepared for a typical recession. The problem is this is not a typical recession.
What about the public pensions that so troubled the senator? True, state and local pensions in the aggregate are underfunded by more than $1 trillion. It’s a serious problem that will require benefit cuts, tax increases, or both. But pension contributions account for roughly 5 percent of state and local combined expenditures, far less than the major components of state and local government such as health care and education.
And pension problems also vary considerably across states. Wisconsin has a fully funded pension program, while (ahem, senator) Kentucky has funded less than half of its pension obligations. Plus, as with rainy day funds, pension funding was improving before the coronavirus. For example, the governors of Illinois and New Jersey, two states rightly maligned for their underfunded retirement programs, both laid out plans for increased state payments into their pension funds earlier this year.
Regardless, states are not in a pension crisis. They are in an unprecedented revenue crisis created by government decisions (both federal and state) to shut off big parts of the economy in response to COVID-19. There was no way to prepare for this.
And unlike rainy day funds and pensions, the fiscal fallout from this crisis will not vary significantly across states. Revenue shortfalls are overwhelming every state no matter its politics, geography, demographics, or revenue mix.
Recent estimates of one-year revenue losses include Arizona ($1.1 billion), Connecticut ($1.4 billion), Hawaii ($1 billion), Illinois ($4.6 billion), Kansas ($800 million), Michigan ($1 to $4 billion), South Carolina ($1 billion), and Texas (“several billion dollars”). In many states, these totals are already larger than their rainy day funds. And there is a good chance state finances will get worse as we see how deep this recession will be and how long it will last.
This is why the National Governors Association is asking Congress to send state governments $500 billion. And it’s not a “bailout,” it’s emergency economic relief.
For the most part, states (unlike the federal government) cannot deficit spend. Thus, without adequate federal dollars, states will have to make devastating cuts to programs that residents and businesses rely on—especially in hard times. State and local governments also account for nearly 20 million jobs, or nearly 13 percent of the American workforce. We’re already seeing some states (and localities) enact hiring freezes and laying off workers.
An inadequate federal response led to a spiral of state spending cuts and layoffs in the wake of the Great Recession. The result was that state and local governments became a drag on the nation’s economic recovery. This recession could very well prove worse. Congress needs to do better.
The Senate majority leader should drop his baseless talking points, listen to Democratic and Republican governors, and work to provide desperately needed assistance for states, businesses, and workers.
