STUMP » Articles » State Bankruptcy and Bailout Reactions: Chicago Pleads, Bailouts Rationalized, and Bailouts Rejected » 26 June 2020, 20:49

Where Stu & MP spout off about everything.

State Bankruptcy and Bailout Reactions: Chicago Pleads, Bailouts Rationalized, and Bailouts Rejected  


26 June 2020, 20:49

Yeah, I’m in no hurry to get through all my overviews of states and cities under fiscal stress. It’s been a really rough week for me, and while I did my last reactions post a month ago, there are more pieces to post.

These reaction pieces are going to keep getting churned out all year, even after Congress does… whatever they think they’re doing. Nobody is really paying attention to them right now. They’re not really doing anything.

No, COVID didn’t cause Chicago’s financial woes

It just made them worse. A lot worse.

Let’s look at what we were reacting to.

Chicago holds itself hostage:

Chicago will be faced with a series of “really, really difficult or impossible choices” without another round of stimulus money to replace revenue lost during the coronavirus pandemic, Mayor Lori Lightfoot said Monday [June 8].

Chief Financial Officer Jennie Huang Bennett reiterated that the stay-at-home shutdown of the Chicago economy triggered by COVID-19 would cost the city “in excess of $500 million” this year — and pegged the 2021 shortfall at “upwards of $1 billion.”

Huang Bennett reiterated the long-term cost to Chicago would depend on how quickly the local economy bounces back and how much revenue replacement money is earmarked for cities and states in the next wave of stimulus money coming from the federal government.

“We are going to need some level of federal funding to help support us during this time frame, which is appropriate. I mean — what we’re facing by way of COVID and the revenue losses and also many of the expenditure increases are … the result of a one-time event that you would never have expected over a lifetime,” the CFO said during a conference call.

Already, Chicago has received $1.13 billion in federal stimulus money, but only to cover expenses tied to the city’s response to the pandemic. None of it will replace lost revenues.

There is plenty more, but I think we can cut it off here. I will write more about Chicago later, but just wanted to get it out there.

If you were in a bad fiscal position before COVID, after so many years of good economic environment, there is no doubt: after COVID, you’re in a horrible situation. No kidding.

It is grimly amusing to me of the various states and cities crying about their revenue loss, and pretending they would have been just fine if it weren’t for that darn COVID.

The problem the bailout people can’t get around: it rewards bad behavior

If you can’t read that [it’s in the image], DeSantis [governor of Florida] said:

There is going to be a lot more vetoes. There’ll be a lot of red,” he said during a Tuesday press conference, referring to changes he will make to the budget. “It’s kind of the veto equivalent of the Red Wedding from ‘Game of Thrones.’ There is going to be things in my budget that I am definitely going to veto just because the fiscal picture is different.”

Sounds like the governors of Florida get line item veto power. Huh, all but 6 states grant it to their governors. The six exceptions are: Indiana, Nevada, New Hampshire, North Carolina, Rhode Island, and Vermont.

I could say that some of the states not cutting…

Washington State:

The highly-rated states didn’t get that way by accident.

The very low-rated states and territories, similarly.

It wasn’t they were all hunky-dory and then some were struck down by the hand of God. Many were already in a bad position, even after a decade of economic growth.

They shared some elements in common: ever-escalating costs [especially for public pensions], a habit of borrowing to fill holes in operational budgets [even if they supposedly had balanced budget requirements], and a propensity to be dependent on taxes on “rich” people. That this misbehavior didn’t get better when times were good was totally predictable. It was seen as an opportunity to hike up costs more.

More pro-bailout pieces

Strategy one: Don’t call it a bailout

Durbin: Illinois Needs Federal Assistance, Not ‘Pension Bailout’

[Senator Dick] Durbin [of Illinois], who as the Democratic Whip holds the second-highest position in the chamber, is less optimistic that the federal government will come through with money for state and local governments looking for help with fallout from COVID-19 closures.

“I don’t think President Trump is going to do Illinois any favors,” Durbin said. “But if he comes up with a program to help the nation, it could help our state too.”

A stimulus bill known as the HEROES Act passed the U.S. House last month and is pending in the Senate, but Trump and Republican leadership in that chamber have said they do not support additional local government assistance.

“We desperately need it in Illinois, we need it in the counties, we need it in the cities – they lost so much revenue, they’re going to have to start laying off teachers and nurses, doctors and policemen and essential employees of our local and state government. That would be a disaster. So I hope that they can be persuaded to come around,” Durbin said. “What it boils down to is — we’ve made it clear, the governor’s made it clear to the Republicans in our delegation — we’re not seeking a pension bailout. We’re asking for the same help every other state is asking for, and that is the lost revenues that are hundreds of millions of dollars that need to be made up by some benefits coming from Washington.”

Except your local politicians did ask for an explicit pension bailout. I haven’t forgotten that.

That said, the only “fair” way to do any state “assistance” is per capita, because it doesn’t reward the profligates nor punish the prudent. Maybe, eventually, Congress will get around to doing something with that.

A detail:

The state’s new budget, set to take effect next Wednesday, July 1, relies on up to $5 billion in borrowing in part from a federal program explicitly meant to help governments stem the tide due to the revenue hits caused by COVID-19.

I’m not writing more about this right now. But I will get to this. Illinois was the first state to use the Fed facility. Some other states are also looking at this.

By the way, the state budget passed in Illinois assumes they’ll be allowed to use the $3.5 billion already allocated via the CARES act for non-COVID purposes.

Strategy 2: DOOOOM and shouldn’t we all get along?


If another federal coronavirus stimulus package is enacted, it’s likely to be the last one to come out of the 116th Congress. That’s why now is the time for leaders of state and local governments to blitz Capitol Hill and bring a new stimulus bill that offsets their governments’ budget shortfalls over the finish line.

1. The economy will not recover anytime soon without such assistance. In 2019, state and local government spending was 17 percent of GDP. If there is no federal assistance, the balanced-budget requirements in 49 states and many local governments will force them to cut spending far more than they already have, raise taxes or both.

2. Good partners help each other. The United States has a federal-state partnership: The federal government runs only two major domestic programs, Social Security and Medicare, while states administer all of the others. The system is very interdependent and very efficient, as states are allowed to tailor programs such as health care and food assistance to the unique needs of their citizens.
3. There are two precedents that worked well. Both in 2003 and 2009, Congress recognized that it needed to assist states in order to offset their proposed budget cuts and tax increases and to stabilize the economy.

In 2003, the states received $20 billion in flexible funding. The first $10 billion was for Medicaid, but the money was flexible in that states could free up their own funds budgeted for the program and use those funds for other critically needed services. The second $10 billion was in the form of flexible block grants.

The 2009 stimulus law, the $787 billion American Recovery and Reinvestment Act, provided $154 billion in flexible funding, an increase of about $100 billion in the federal share for Medicaid, and $54 billion in a stabilization fund primarily for education.

Okay guys, let us look at those amounts. I’m not even going to inflation-adjust anything.

The bailout passed by the House starts with $200 billion for the states… but that doesn’t include the other parts to prop up states. The total bill was $3 trillion (and is not even getting considered in the Senate.)

So, if we ignore the money pledged for direct COVID relief in the CARES act, there’s $500 billion for the states over two years. That $20 billion in 2003 just looks silly against the $500 billion mentioned. The $150 billion from 2009 mentioned is getting closer to the order of magnitude, but still is puny next to $500 billion. And most of it was for Medicaid. Some thoughts on Medicaid below.

More pro-bailout pieces:

I do at least have some sympathy for business owners who know they’ll be targeted (on top of being targeted by looters, in some cities), but it might be more to the point if they also put some pressure on the local polity to slim down a bit.

A tangent on nursing home deaths and Medicaid

Above, it was mentioned about two prior bailouts in 2003 and 2009, where the bailouts were primarily Medicaid money. You might think that COVID would add to Medicaid expenses, but that’s not at all clear to me, especially if one of its costliest coverages is getting… hmmm, what was the word Stalin used about the Ukranians?

I haven’t written about it much, but a very large percentage of U.S. COVID deaths were in nursing homes. (And, of course, the official numbers are suspect.)

To be nasty about it, a large amount of Medicaid funds are spent on nursing homes. By count, Medicaid covers more than 60% of nursing home residents. It costs nothing in Medicaid funds if said nursing home residents die.

People were asking me how much COVID deaths would improve funding ratios for public pensions (my quick answer: the mortality is really not high enough. Yet.)

But they didn’t ask how much Medicaid costs would be lessened by these deaths. That’s not really my area, to be sure, but it will be interesting to see the results coming out of this. New York has very high Medicaid costs, and my very cynical mind goes to that is why Cuomo forced nursing homes to take positive COVID patients. By the time Cuomo forced nursing homes to take COVID positive folks, there had been plenty of experience in Europe to show that was a bad idea… unless your goal was to kill off a bunch of old people who are expensive to keep alive.

If you look at the cost per Medicaid enrollee, New York has very high costs compared to other states, especially when you look at “aged” enrollees. The per aged enrollee cost for New York is $21K from that data… from FY2014. I rather imagine they’re more expensive now.

Here is a graph:

Just something to think about.

More anti-bailout pieces

MICHAEL LAFAIVE AND CAROL PLATT LIEBAU: State and local bailouts would reward fiscal wastefulness

The House recently passed a plan for the federal government to spend another $3 trillion to help mitigate the impact of the COVID-19 pandemic. Congress should stop this proposal in its tracks — particularly its elements that are unrelated to the pandemic.

Some lawmakers want the federal government to shower state capitols with money, not just to backfill revenue losses, but to cover expenses for problems that existed long before the pandemic began. Pension underfunding is one example. Some states failed to set aside enough money to fund their pension promises; now, they want taxpayers everywhere to subsidize their fiscal follies.
Contrast these two states [Illinois and Connecticut] with Michigan. The Great Lake State suffered its own one-state recession in the 2000s, which was compounded by the Great Recession. It struggled but worked hard to balance its own budget and enacted prudent fiscal reforms. For example, lawmakers worked to prevent future problems by moving to 401(k)-style retirement benefits and using better assumptions about plans going forward.

This history of hard-won reform is important because a bailout effectively would reward the fiscal mismanagement of officials in states such as Illinois or Connecticut while punishing lawmakers in Michigan for their hard work and restraint. In short, bailouts would discourage sound solutions and real leadership, and encourage more bad choices. Forcing all taxpayers to bail out fiscally irresponsible states and local governments would be a profound injustice to those who have voted for more responsible leadership. It also would increase America’s $25 trillion debt load.

Nobody cares about the debt now. After all, won’t they be dead when it comes due? And so many had so few kids, so they aren’t worrying about posterity.

Johnny Kampis of the Taxpayers Protection Alliance: Opinion: States pleading for federal bailout are the most poorly managed

An annual study by national financial watchdog Truth in Accounting (TIA) found that many of the states that are now crowing the loudest for a federal bailout during the pandemic are among the states that are performing the poorest.

TIA found that some of these poorly managed states have huge taxpayer burdens, which the organization defines as each taxpayer’s share of state bills after the state’s assets have been tapped.

TIA’s home state of Illinois finished second worst in the study with a taxpayer burden of $52,600. The state has requested a bailout package of $41.6 billion with no strings attached so Illinois leaders could theoretically use a healthy part of the money to help shore up its $100 billion-plus pension shortfall that is unrelated to the pandemic.
A study from the American Institute for Economic Research backs up TIA’s findings. The organization found that the more a state was governed by Democrats in recent decades the larger its debt burden — on average the difference was more than double.

But it’s not just a blue state problem. Kentucky finished seventh in the TIA study with a taxpayer burden of $25,700. Senate Majority Leader Mitch McConnell, a Republican, has suggested states go into bankruptcy to manage their shortfalls, a comment that was widely criticized by leaders on both sides of the aisle.

Part of the problem is that many states aren’t prepared for such a swift and major financial downturn. The Pew Charitable Trusts found that states had rainy day funds that represent a median figure of 7.7% of general fund expenditures.

I wouldn’t call Kentucky a “red state”. It has a Democratic governor currently, and had one before Bevin (who got voted out for Beshear). I would term it “purple”, and its fiscal troubles, like both Illinois’s and New Jersey’s [who also had Republican governors off and on], are of long standing.

The Heritage Foundation notes that states have already received more than $200 billion in grants and $500 billion in loans to municipal governments while also benefiting in tax revenue from the $1 trillion-plus that has flowed to their residents and businesses.

The group’s president, Kay C. James, argues that enough is enough, pointing out that previous bailouts were squandered by states rather than being used for their intended purposes.

“Bailing out states is, simply put, a bad idea,” she wrote. “It shields politicians from the consequences of their actions and encourages the same reckless spending habits that got them into a financial mess in the first place.”

Simply put, the states had a decade of good economic times to prepare for the bad times that would eventually come. If it weren’t a pandemic, it would be something else. Eventually, something bad happens.

More anti-bailouts:

I can find lots more like these. But I’ll give it a rest for now.

Wait-and-see on bailouts

This one is a bit different:

Brain Riedl at the Manhattan Institute: No Rush for State Bailouts

The inability to determine the scale of state budget shortfalls makes a large federal bailout premature. Washington should let states plug immediate budget holes with leftover funds from an earlier $150 billion pandemic grant and encourage them to start drawing down $113 billion in savings. This will buy time to see how quickly the economy can pick up speed after it reopens and reveal how much additional funding states really need. It will also decrease the likelihood that funds get diverted to unintended uses, such as bailing out state pension systems that have faced shortfalls for years before Covid-19 came along.

Virtually every state requires a balanced budget to some degree. Yet, when recessions reduce state tax revenues and raise unemployment costs and spending on social services, states understandably hesitate to raise taxes or reduce spending. Instead, they appeal to Washington to use its own borrowing authority to bail them out.
A key challenge in designing any federal assistance to states is ensuring that the funds are used for their congressionally intended purpose. Republican lawmakers have been disturbed by states such as Illinois hinting that general assistance would be used to bail out their long-underfunded state pension system, rather than ensure the continuation of existing state programs with minimal job layoffs. Washington’s role should be limited to addressing cyclical state budget deficits, not letting states offload their past irresponsible budgetary decisions onto the federal government.
Perhaps the best option would be to calculate future state aid as a specific share of each state’s revenue shortfall—perhaps 60 percent. That way, states will need every bailout dollar just to finance current program commitments, with no extra money available for pension bailouts.
Pessimistic projections that states and cities need more than $500 billion in federal aid may turn out to be accurate, but it would be fiscally irresponsible for Washington to commit that sum, or even more, before knowing the depth of the need. The combination of state government savings and federal legislation freeing up past pandemic funds can buy time to assess the economic and fiscal situation at the state level and ensure a more responsible funding package.

Again, why should it be dependent on revenue loss? [however that would be measured]

Different states make different choices about the level of taxation they impose on residents, visitors, and more. There is no reason the federal government should give more money to those who tax more.

This is a different kind of “wait on bailouts”: WSJ Editorial: Waiting for the Biden Bailout

American workers and businesses have had to cut their spending for weeks amid the pandemic, but in America’s most spendthrift states the message is: What, me worry? House Speaker Nancy Pelosi has a plan to bail them out, and if she fails Joe Biden will deliver in 2021.

Take California, where Democratic leaders in Sacramento this week rejected Gov. Gavin Newsom’s plan for budget triage that included a $14 billion spending cut, suspension of union raises, plus a 10% pay cut for state workers. Mr. Newsom also called for a $4.4 billion increase in business taxes by eliminating certain deductions and credits.

The Legislature pocketed Mr. Newsom’s tax increase, naturally, and raised him $14 billion in spending. Its plan moves cash around state budget accounts and counts on the “strong likelihood” of a federal rescue, Assembly Budget Chairman Phil Ting candidly said.
Democrats think the dice are loaded in their favor. President Trump seems inclined to agree to a state rescue, perhaps in exchange for Covid-19 liability protection for businesses as they reopen, or as he said Friday a temporary payroll tax cut. If Joe Biden wins with anti-Trump coattails that give Democrats a Senate majority, blue states will be rolling in dough. The losers will be taxpayers in other states that aren’t run by public unions.

Don’t assume that states where public unions rule the roost are all “blue”.

Prior reaction posts

A compilation of what went before.

Here is my prior compilation of responses to bailout and state bankrupty ideas: By the way, in the middle of this, the House passed the HEROES act which was larded up with bailouts. But not all the ones people were asking for.

See ya next week!

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