Fact Check: What Bankruptcy Really Means for Struggling States

Fact Check: What Bankruptcy Really Means for Struggling States

(RightWing.org) – Earlier this week, Senate Majority Leader Mitch McConnell (R-KY) said free money for states ought to come to an end. Long before the state-induced government shutdowns of businesses and shelter-in-home orders, many states were hurting financially. Crippling pension costs, social welfare programs, expanded Medicaid benefits, and high education spending were the main culprits.

In 2011, the total debt held by all 50 states was $1 trillion. To add to it, California, Connecticut, Illinois, New Jersey, New York, and Pennsylvania were expecting multi-billion-dollar deficits in 2020 and 2021, and this is before the COVID-19 pandemic. Unlike the federal government, states cannot print money and must balance their budgets. Instead of doing that, they’ve relied on the federal government to bail them out.


As of April 24, 2020, the federal government has spent nearly $4 trillion over 7 weeks to try to keep the economy propped up during the pandemic. On Wednesday, McConnell said it’s time to put a pause on spending and more debt. He went even further, saying states should no longer get bailouts from the federal government. Instead, the law should be changed to allow them to file bankruptcy. What ensued was a war of words from Democratic governors who claimed McConnell’s proposal was absurd.

But was it?

Since 2000, federal government bailouts more than doubled. A disproportionate number of these go to spending-heavy states, which in turn encourages more spending and more debt.

There may be some good arguments for bankruptcy over state bailouts. Let’s examine what some of those are:

  • Bankruptcy allows states in danger of defaulting to reorganize their finances free from crippling union contract obligations, many of which were precedent-setting years or even decades ago. Federal government bailouts don’t solve underlying problems, and taxpayers end up paying higher federal and state taxes.
  • Bankruptcy allows states to propose the elimination of some, or all, government employee contracts and establish new work rules, benefits packages, and compensation. Bailouts empower the status quo.
  • Bankruptcy allows states to reform their broken, highly-expensive, and underfunded pension programs for current and future workers while maintaining promises to workers in or near retirement. Bailouts empower unions to negotiate for better pensions that cost more money.
  • Bankruptcy allows a state to restructure its debt and other contractual obligations. Bailouts may catch a state up on its bills, but the debt returns soon after without consequences for bad choices.
  • Bankruptcy forces governors and legislatures to think more deeply about their spending. As a state borrows more money against their credit, the interest rates rise, making it more difficult to secure future credit as creditworthiness drops. Under a bailout, who cares about creditworthiness if the federal government is giving away free money?

If the federal government ended state bailouts and forced them to file bankruptcy, states would immediately become more accountable to their citizens. As it stands, citizens rarely, if ever, know their state is even getting a bailout. Which means taxpayers don’t know what’s going on.

After COVID-19 is in the history books, states that have been irresponsible over the last few decades will be asking for a bailout. Perhaps it’s an excellent time to re-evaluate that moving forward.

By Don Purdum, Freelance Contributor

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