Senate Majority Leader Mitch McConnell told a national radio audience earlier this week that “we’re going to hit the pause button” on legislation to provide fiscal assistance to states and local governments whose revenues are plummeting amid the coronavirus pandemic. And McConnell took things a step further, saying bankruptcy should be an option for states whose fiscal burdens are compounded by their public-pension deficits. In other words, stiff the bondholders and retirees.
Conflating historical pension deficits with 2020’s COVID-19 budgetary emergencies, McConnell may have earned a place in history right alongside Marie Antoinette, who purportedly said of her subjects who had no bread, “Let them eat cake.“
The deficits of the nation’s worst-funded state pension plans have nothing to do with the pandemic mess we are now in. They are the cumulative result of decades of fiscal mismanagement by both political parties, most typically from inadequate employer and employee contributions coupled with unrealistic actuarial and earnings assumptions. This year’s stock market slump hardly moves the needle on that problem, because the markets are still trading at levels similar to the pensions’ last actuarial valuation, in 2018.
Never mind that the stakeholders who have the most to lose in a state bankruptcy are bondholders, not pensioners. Virtually every municipal bankruptcy in U.S. history confirms that. And never mind that the federal bankruptcy code does not allow states to file. That’s a matter of constitutional and legislative history, affirmed by the Supreme Court, so any move to allow states to take the bankruptcy route would face towering political and possibly constitutional hurdles.
If those were the only crazy elements of McConnell’s baseless pontificating, I would hold my nose and let the stink pass. But that is only half of the story here. The other half is the slap the Kentucky Republican is giving to his own voters. This article describes the nation’s worst-funded public pension systems; guess which state comes out at rock bottom for its funding ratio, with the nation’s worst percentage deficit? That’s right, it’s Kentucky.
So I can’t wait for this juxtaposition of fiction with facts to go viral — for one of the three most powerful people in Washington, D.C., to have to explain to voters in his home state that he has put a bankruptcy bull’s-eye on them instead of bringing home the bacon in the form of federal assistance.
Indeed, McConnell's bankruptcy remarks could haunt the majority leader politically in November, when he faces a serious re-election challenge from Democrat Amy McGrath. Don’t be surprised if the former Marine fighter pilot hammers McConnell over the issue, or if some major campaign contributions flow to her from the bond-management community that has far more to lose from another term with the incumbent. The global financial implications are far larger than just Kentucky pensions. Talk about burning your bridges!
Investors worldwide must also now wonder whether the same solution — bankruptcy in some form — will apply some day to the unfunded U.S. Treasury deficit bonds that Congress has thrust on us taxpayers as it doles out a trillion dollars to businesses facing the brink of their own bankruptcy.
If both President Trump (as proclaimed in his book The Art of the Deal and his own court filings) and the Senate majority leader believe that bond defaults through bankruptcy are now the normalized answer — because investors, as Trump once put it, “are all big boys and girls” — then we and our unborn children are in very deep trouble.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.