McConnell says giving aid to states to help ease the pain from the pandemic would be a 'blue state bailout.' But most states were doing the right thing before the coronavirus hit.

• McConnell's comments about bailing out blue states that had mismanaged their finances is off the mark, experts say.
• States had actually bolstered their cash reserves and rainy day funds in the decade since the Great Recession.
• The idea of allowing states to file for bankruptcy has been widely panned in the past.
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Senate Majority Leader Mitch McConnell said on Wednesday he would rather see states go bankrupt than extend them a federal bailout, casting Democratic states in particular as irresponsible spenders.

"I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated," the Kentucky Republican said in a radio interview. "There's not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations."

His office later sent a press release doubling down on the remarks with the heading "a blue state bailout." It set off an uproar among Republican and Democratic governors alike, The Washington Post reported.

"This is one of the really dumb ideas of all time," New York Gov. Andrew Cuomo said at a coronavirus press briefing on Thursday, and tore into the remarks as "irresponsible and reckless."

Gov. Larry Hogan of Maryland, a Republican who heads the bipartisan National Governors Association, also blasted McConnell's statements.

"The last thing we need in the middle of an economic crisis is to have states all filing bankruptcy all across America and not able to provide services to people who desperately need them," he said.

McConnell's comments, though, mask a different reality for state governments leading up to the pandemic. States actually had more cash reserves this year than they did immediately before the 2008 financial crisis that sparked the Great Recession. And they now confront the prospect of losing crucial sources of income and sales-tax revenue due to people significantly reducing their spending amid massive job losses.

Michael Leachman, the senior director of state fiscal research at the Center on Budget and Policy Priorities, said states could not have predicted the pandemic. But regardless of the onset of a public health emergency, many had moved to bolster their preparedness for an economic downturn.

"They did a reasonable job of saving for a recession," he wrote in a blog post.

He pointed out that states overall had boosted their "rainy day" funds — designed to address unexpected revenue shortfalls or additional spending needs — to 7.6% of their budgets this year compared to 5% in 2006, just before the onset of the Great Recession.

According to the Pew Charitable Trust, 34 states had increased their cash reserves, and they collectively amassed the largest fiscal cushion in nearly two decades.

The notion of allowing states to go bankrupt has been widely criticized in the past.

After the 2008 financial crisis, Republican and Democratic governors — as well as Wall Street investors and public-sector unions — argued that going down that route would throw the bond market into chaos and increase the cost of borrowing for states, Bloomberg reported.

They also said that it would throw the bond market into chaos and increase interest rates for states.

Still, that didn't prevent others from making similar arguments to McConnell's. Nikki Haley, the former governor of South Carolina, said states should have prepared more for the pandemic despite the fact that they already had larger cash reserves.

"States should always plan for a rainy day just like any business," she said on Twitter. "I disagree that states should take Fed money or be bailed out."

—Nikki Haley (@NikkiHaley) April 23, 2020

She went on: "This will lead to taxpayers paying for mismanagement of poorly run states. States need to tighten up, make some cuts, and manage."

But experts say that without an emergency federal lifeline, states face the prospect of slashing important public services.

"If nothing changes, states will soon be forced to make deep cuts in vital public services, worsening the recession and slowing the ensuing recovery," Matt Fiedler, a top Obama administration economist, wrote in a New York Times op-ed on Wednesday.

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