Mitch McConnell says cash-strapped states hit by coronavirus should go bankrupt, rather than receive emergency federal aid

• McConnell said he'd rather let states financially squeezed by the coronavirus declare bankruptcy instead of extend federal aid that would require further deficit spending.
• "My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don't have to do that. That's not something I'm going to be in favor of," he said on Hugh Hewitt's radio show.
• Experts say states are facing a severe cash-crunch as tax revenues plummet and unemployment soars, leading to a need for immediate federal aid.
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Senate Majority Leader Mitch McConnell said in an interview on a prominent radio show on Wednesday that economically struggling states should declare bankruptcy rather than be given a federal bailout.

"I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities," McConnell told conservative radio host Hugh Hewitt. "And there's no good reason for it not to be available."

The host mentioned several states like California and Illinois that assumed high public employee union costs, and said he opposed an attempt from the federal government to rescue their finances.

"My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don't have to do that. That's not something I'm going to be in favor of," McConnell said.

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The comments from McConnell come as states face the prospect of quickly depleted budgets in the wake of the coronavirus pandemic. The Republican senator recently said on Tuesday the "extraodinary" national debt was a reason he sought to wait until May to push for more coronavirus relief in Congress.

States tend to operate differently from the federal government when it comes to their annual budgets. They usually can't deficit-spend, meaning any increase in their expenditures must be financed with a tax increase or another new source of revenue, per the Urban Institute.

In the aftermath of the 2008 financial crisis, the idea of allowing states declare bankruptcy was roundly criticized by GOP and Democratic governors, as well as Wall Street investors and public sector unions, Bloomberg reported. They warned going that route would throw the bond market into chaos and lead states to face higher interest rates.

Many economists say states across the country face severe pressures on their finances as a result of the pandemic. The skyrocketing number of Americans filing for unemployment means state governments set to lose a crucial source of income and sales tax revenue as people drastically reduce their spending.

That's combined with increased demand for safety net programs like Medicaid, which states are partially responsible for paying. Without another round of federal aid, cuts to public programs would be inevitable.

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

The National Governors Association has called for at least $500 billion in relief for states and local governments. But that was left out of the interim relief package aimed for small businesses and hospitals that the Senate passed on Tuesday.

President Trump has said state and municipal aid would be a part of the next coronavirus relief package.

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