Cities, states beg for bailouts

The coronavirus pandemic has unified Congress in a way few other things have. The first three economic aid bills sailed through both chambers with huge majorities.

But the gulf between parties began to reopen during negotiations for a fourth supplemental package to replenish small business aid. Now Republicans and Democrats appear poised to resume an all-out war as a fifth COVID-19 legislative effort gets underway on Capitol Hill.

Financial aid for state and local governments has emerged as one of the biggest sticking points. Lawmakers are not just split on how and when it should happen, they cannot agree on whether Congress should send states a cash infusion at all.

“Well-run States should not be bailing out poorly run States, using CoronaVirus as the excuse!” President Donald Trump tweeted on Tuesday. “The elimination of Sanctuary Cities, Payroll Taxes, and perhaps Capital Gains Taxes, must be put on the table.”

As unemployment numbers skyrocket—more than 20 million Americans lost their jobs in April—state tax bases have shrunk dramatically. Lawmakers drafted state budgets expecting a booming economy. Now those budgets are next to worthless. Nine states—California, Connecticut, Hawaii, Illinois, Massachusetts, New York, Ohio, Texas, and West Virginia—plan to ask the U.S. Department of Labor for $36 billion in federal advances to cover unemployment payouts, Politico reported.

Meanwhile, the bipartisan National Governors Association has asked for $500 billion to help states.

But some leading Republicans are tapping the brakes, pointing to long-standing financial issues in some of the states seeking help. Illinois, saddled with a $486 billion debt load, wants a $10 billion bailout to help with its pensions.

“I would certainly be in favor of allowing states to use the bankruptcy route,” Senate Majority Leader Mitch McConnell, R-Ky., told radio host Hugh Hewitt last month. “It saves some cities. And there’s no good reason for it not to be available.”

McConnell’s comments drew widespread criticism, but he has not backed down. Last week, he said he would not support anything that underwrites revenue replacement or long-standing pension problems for states. House Minority Leader Kevin McCarthy, R-Calif., took the same position this week.

GOP Sens. Mike Lee of Utah, Rick Scott of Florida, Ted Cruz of Texas, Ron Johnson of Wisconsin, and Mike Enzi of Wyoming sent a letter to Trump expressing similar concerns.

“We believe additional money sent to the states for ‘lost revenue’ or without appropriate safeguards will be used to bail out underfunded pensions, reward decades of state mismanagement, and incentivize states to become more reliant on federal taxpayers,” the senators wrote.

So far, Congress has provided $150 billion in aid to states and cities in its $2.2 trillion economic relief package for COVID-19 expenses. Some Republicans, including McCarthy, have floated the idea of giving recipients more flexibility in how they use that money rather than issuing a massive new bailout.

House Speaker Nancy Pelosi, D-Calif., suggested state and local governments might need $1 trillion. Democrats also have not ruled out underwriting pension payments and want to give states more money for Medicaid. They have backing from governors and the U.S. Conference of Mayors, which requested $250 billion in emergency aid to cities. Without it, proponents say, state and local governments will have to lay off millions of workers, and vital services to communities will suffer.

Federal law does not have a provision for states to declare bankruptcy like municipalities can. It would require a change to the bankruptcy code, which does not appear to have a viable path through Congress.

“It may well be necessary in the long run,” said Ramesh Ponnuru, an economic researcher at the American Enterprise Institute. For now, he said, lawmakers should evaluate which state “expenses are a result of this public health and economic emergency and which are the results of mismanagement?”

Jonathan Williams, the chief economist at the conservative American Legislative Exchange Council, said fiscal conservatives share a growing sentiment that “enough is enough. We’ve maxed out the federal credit card; any new spending needs to be offset by spending reductions.”