McConnell suggests states declare bankruptcy during pandemic. Is that even possible?
Forget federal aid, Sen. Mitch McConnell of Kentucky has suggested states file for bankruptcy to combat an economic downturn caused by the coronavirus pandemic.
High unemployment numbers and a lag in cash flow have beleaguered states coping with rising COVID-19 casesand deaths amid a nationwide shut down. Congress already passed one stimulus package with a $2 trillion price tag, but McConnell said he ”opposed an attempt by the federal government to rescue (states’) finances,” Business Insider reported.
“I would certainly be in favor of allowing states to use the bankruptcy route,” the U.S. Senate majority leader said Wednesday on the Hugh Hewitt radio show, Bloomberg reported. “It’s saved some cities, and there’s no good reason for it not to be available.”
New York Gov. Andrew Cuomo called it “one of the really dumb ideas of all time” during a press conference Thursday, according to MSBNC.
States can’t currently declare bankruptcy, though cities and municipalities can file for Chapter 9 protection, according to Reuters. Puerto Rico, as a U.S. territory, also got special permission from Congress to file for a form of municipal bankruptcy in 2017 after being battered by Hurricane Maria.
But neither the federal bankruptcy code nor the U.S. Constitution allows states to file, according to the Council of State Governments.
“At the time of the Constitution’s drafting, states sometimes tried to abandon valid debts owed by the state or one of its citizens,” the public radio station at the University of Illinois reported. “A New York creditor might try to enforce a debt in Georgia only to find that a Georgia state law had nullified the debt.”
Under the Constitution’s contracts clause, states are barred from “impairing the obligation of contracts,” according to the station.
The U.S. Supreme Court has interpreted that to mean “a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money (on something else),” according to CSG.
At least three things would need to happen if the federal government wants states to declare bankruptcy, Kenneth Katkin, a law professor at Northern Kentucky University, wrote in a blog post for CSG in 2017:
- Congress would have to add state governments to the list of entities allowed to file for bankruptcy under the U.S. bankruptcy code,
- The state would have to amend its laws allowing it to file, and
- The U.S. Supreme Court would have to decide whether the contracts clause “prohibits states from declaring bankruptcy even if authorized to do so by Congress.”
In 2017, there was some speculation as to whether Illinois could become the first state to declare bankruptcy. The state had a backlog of bills totaling $15 billion — or 40 percent of its operating budget, Ratings agency Moody’s Investor Service said at the time, according to CBS News.
Other states have defaulted on debt, like Arkansas during the Great Depression, and cities like Detroit have filed for bankruptcy with some success, CBS reported.
But it’s not clear what a bankruptcy proceeding for states could mean during the coronavirus crisis — save economic disaster, according to Cuomo, who has said finding funding for state and local governments should be a priority for Congress.
“You want to see the market fall through the cellar?” Cumo said. “Let New York state declare bankruptcy. Let Michigan declare bankruptcy. Let Illinois declare bankruptcy. Let California declare bankruptcy. You will see a collapse of this national economy.”
This story was originally published April 23, 2020 at 2:40 PM with the headline "McConnell suggests states declare bankruptcy during pandemic. Is that even possible?."
