Last week, Kentucky’s senior Sen. Mitch McConnell suggested that states be allowed to declare bankruptcy as they struggle with cratering tax revenues during the coronavirus pandemic.
The comments came as governors across the country are calling for federal help to prop up state budgets. Earlier transfusions of cash for states — of which Kentucky received about $1.6 billion—are only allowed to be used for response to the pandemic.
But allowing states to file for bankruptcy would require Congress to pass a law allowing it, state legislatures would have to enact their own policies and legal experts say it would likely be challenged for violating the U.S. Constitution.
Ken Katkin is a law professor at Northern Kentucky University. He says the issue hasn’t been tested.
“There is some constitutional doctrine that would suggest a state can’t enter into contracts and then relieve itself of the obligation to pay the debts under those contracts, which is what bankruptcy would entail,” Katkin said.
States aren’t allowed to file for bankruptcy right now, only municipalities are—everything from cities, counties to local school boards. The process allows a court to restructure an entities’ finances—everything from selling off assets to reducing its financial obligations.
The largest example of a city declaring bankruptcy is Detroit in 2013. During that process, city retirees had their pensions cut 4.5%, cost-of-living increases eliminated and insurance coverage reduced.
Last week, Kentucky Gov. Andy Beshear told CNN that he hoped McConnell misspoke when suggesting that struggling states declare bankruptcy.
“I hope they were in reference to something else because bankruptcy for a state would be disastrous,” Beshear said.
Beshear and governors across the country have called on the federal government to send more money to states.
McConnell, a Republican, has dismissed the requests as “blue state bailouts,” singling out Democratic-run states like Illinois and California that have massive pension problems.
“I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated,” McConnell said on the Hugh Hewitt radio show last week.
“There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
President Donald Trump weighed in with similar comments earlier this week, via Twitter.
“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?,” Trump wrote
Though Kentucky has a Democratic governor, it has a Republican-led legislature and hasn’t voted to send a Democrat to the U.S. Senate since 1992 or to the White House since 1996.
McConnell is up for reelection this year for what would be his seventh term in the Senate.
Amy McGrath, the Democrat who has raised the most money to try and unseat McConnell, bought commercial airtime across the state this week criticizing McConnell for the bankruptcy comments.
“He refuses to give more aid to Kentucky. He says the state should just declare bankruptcy. Special interests win, we lose. Same old Mitch,” a narrator states in the commercial.
McConnell has since softened his suggestion that states be allowed to declare bankruptcy, saying it would have been optional and that he assumed most wouldn’t have done it.
But he still has conditions for sending more funding to states. On Fox News Radio earlier this week, he said he wants Congress to shield businesses and employees from lawsuits related to the pandemic.
“Before we start sending additional money down to states and localities, I want to make sure that we protect the people we’ve already sent assistance to, who are going to be set up for an avalanche of lawsuits if we don’t,” McConnell said.
Kentucky got its first glimpse on Thursday at how much its state coffers are going to suffer during the coronavirus pandemic.
State officials are predicting that when the close books on June 30, the state will have a tax revenue shortfall of between $318.7 and $495.7 million. That’s 3.8% to 4.7% less than the initial estimate.
Tax revenue is expected to fall between 10.5% and 17.2% in the first two quarters of the next fiscal year.