• McConnell says states should have the option of declaring bankruptcy
  • State pension funds are more than $1 trillion in the red with those in Kentucky, New Jersey and Illinois in the worst shape
  • McConnell blocked funds for state and local governments in the coronavirus relief package passed by the Senate Tuesday

Senate Majority Leader Mitch McConnell said Wednesday instead of a federal bailout, he thinks states would be better off declaring bankruptcy to get out from under high public pension costs and the enormous burden imposed by the coronavirus pandemic.

“I would certainly be in favor of allowing states to use the bankruptcy route,” McConnell told syndicated radio host Hugh Hewitt. “It’s saved some cities, and there’s no good reason for it not to be available.”

Colorado, Connecticut, Illinois, New Jersey and Kentucky have among the biggest percentage deficits in their pension funds, with Kentucky, New Jersey and Illinois in the worst shape. Across the country, pension funds were more than $1 trillion in the red.

The idea of changing the bankruptcy code first surfaced after the Great Recession, but it was opposed by Wall Street, public employee unions and governors.

McConnell, R-Ky., Tuesday expressed concern over the nation’s mounting debt – the U.S. was expected to have a more than $1 trillion budget deficit before the pandemic hit – in the wake of the federal government’s coronavirus response, which saw a $484 billion package clear the Senate Tuesday.

In late March, Congress adopted a $2.2 trillion package that had been preceded by two earlier, smaller bills. As of Wednesday, the U.S. debt stood at more than $24.46 trillion. McConnell urged caution before any more mitigation efforts are adopted.

McConnell said he expects states to push for a federal bailout, but “we’re going to push the pause button here because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated.”

McConnell said states “have done [it] to themselves” when it comes to pension liabilities.

“There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” he said, stopping short of saying he would lead the charge to change the bankruptcy code, which currently has no provision for states to declare bankruptcy.

The National Governors Association has estimated it will take $500 billion in direct federal aid to states and territories to ameliorate the effects of the pandemic on state finances.

“These continuing losses will force states and territories not only to make drastic cuts to the programs we depend on to provide economic security, educational opportunities, and public safety, but the national economic recovery will be dramatically hampered,” the association warned in a letter to congressional leaders.

McConnell blocked efforts to include funds for state and local government in the bill that passed Tuesday.