Senate majority leader Mitch McConnell, R-Ky., has not been getting good reviews for his suggestion that state governments be allowed to declare bankruptcy rather than receive federal aid to "bailout" their pensions.
Rep. Pete King, R-N.Y., called McConnell "the Marie Antoinette of the Senate." Maryland Governor Larry Hogan said that McConnell either regretted his comments or would come to regret them.
And that’s just McConnell’s fellow Republicans. New York Governor Andrew Cuomo, a Democrat, said McConnell had made "one of the dumbest statements of all time." Journalistic commentary was similar, with Vanity Fair blasting McConnell’s "political nihilism."
But if you ignore the invective and listen to the points each side is making, you will see that both McConnell and his critics are largely correct — and that they’re talking about different things.
What the critics get right is that the states’ current fiscal crisis is not primarily a result of their irresponsibility. We don’t want the states to raise taxes and slash spending to balance their budgets in the middle of a public-health and economic catastrophe. The federal government, which has greater borrowing capacity, should provide them with relief.
McConnell’s stated concern is that the federal government might pick up the tab for states’ mismanagement of their pensions rather than for the pandemic. Some states have made exorbitant promises to their employees over the years without providing adequate funding.
They made up the difference, on paper, by projecting unrealistically high returns on pension investments.
The Federal Reserve, applying a better projection of returns, estimates that pensions are underfunded by $4 trillion. McConnell is right to think that it would be unfair to make Florida’s teachers and firefighters pay for benefits for their counterparts in Illinois, and unwise to create an incentive for further irresponsibility by state officials.
The president of the Illinois state Senate has already asked for $10 billion in federal help with the state’s pensions. McConnell wants to prevent states from using the coronavirus crisis as a pretext for a wealth transfer that enables them to keep avoiding hard choices.
Emotions run high when billions are on the line, and the controversy turned hotter because McConnell’s comments came in response to questions about funds for Democratic-leaning states. Summarizing one of his interviews in a press release, his office highlighted the remarks about bankruptcy under the heading "blue-state bailouts."
That may have been what prompted Cuomo to shoot back that New York sends more money to the federal government than it gets back, while the reverse is true of McConnell’s home state of Kentucky.
But Cuomo’s shot isn’t really an answer to McConnell. The fact that federal taxation is progressive — the kind of policy that explains the pattern of donor and recipient states, and that Cuomo himself favors — does nothing to justify nationalizing state-pension shortfalls.
Federal law currently makes no provision for states to re-organize their commitments through bankruptcy proceedings. Creating one would not keep the coronavirus from crushing state budgets. It could, however, prevent, or at least limit, future federal bailouts for state mismanagement of pensions.
David Skeel, a law professor at the University of Pennsylvania and the leading academic proponent of a bankruptcy option for states, argues that it would also improve state decision-making. Public-sector unions might push for more up-front funding for pensions, for example, if unfunded benefit promises run a risk of disappearing in bankruptcy proceedings.
Some of the arguments against state bankruptcy, such as the claim that it inevitably favors bondholders over everyone else, are spurious. The idea would, however, face constitutional challenges, as would other proposals to condition federal aid on state reforms.
In the Supreme Court’s 2012 Obamacare decision, seven justices held that the federal government could not make states offers that amounted to coercion. "We’ll help you if you change your pensions’ accounting standards or file for bankruptcy" might count.
But the pros and cons of bankruptcy are, at the moment, somewhat beside the point.
As the reaction to McConnell’s comments suggests, the Democratic House is extremely unlikely to agree to create a bankruptcy option this year. Skeel tells me that McConnell’s office has not contacted him. That’s a signal that he does not have bankruptcy legislation in mind.
The purpose served by McConnell’s remarks is to establish that his tolerance for aid to states has limits and that he will be resisting any effort to exploit the crisis to secure a general bailout for spendthrift states. If McConnell and other Republicans are overzealous about this point, they could skimp on needed funding for state governments.
But for all the indignation it has aroused, the point itself is a valid one.
Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of "The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life." Read Ramesh Ponnuru's Reports — More Here.
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