A nonprofit publication of the Kentucky Center for Public Service Journalism

John Schaaf: McConnell’s talk of state bankruptcy is strange, and his timing of announcement is peculiar

In a strange move, Sen. Mitch McConnell recently announced he favors “allowing states to use the bankruptcy route,” so he’s pushing an idea that would require states to raise taxes and sell off assets such as the Kentucky State Parks.

Sen. McConnell’s announcement is peculiar because of its timing and because of the chaos that would result if a state declared it could not pay its bills.

Luckily, it looks like he was just throwing spaghetti at the wall to see if it would stick. Nobody is taking him seriously because his talk is irrelevant unless he backs it up by sponsoring legislation, which he’s not doing.

Mitch McConnell

Before Sen. McConnell floated his oddball idea, our country was uniting around ways to push back on the coronavirus, which has sickened close to a million Americans and killed about 60,000, with more to come.

Kentucky’s senior senator needlessly injected bankruptcy into what was a bipartisan effort to save the economy and wage an effective fight against the virus.

With nearly unanimous votes in both chambers, Congress is pumping money into the economy to help businesses and individuals pay expenses, while governors of both parties are adopting federal health recommendations to guide them as they move toward reopening the states.

However, the virus has cost billions in unexpected expenses and lost revenue, and the federal government needs to help the states as it has in every disastrous flood, forest fire, financial crash, hurricane, and enemy attack.

While expressing fake outrage about the national debt, Sen. McConnell tried to toss a politician’s stick of dynamite into the middle of united efforts by state and federal leaders to stabilize the nation.

No state has ever declared bankruptcy. Federal law does not allow it, and Sen. McConnell’s words are meaningless unless he introduces a bill to change federal law to allow states to file for bankruptcy.

Sen. McConnell won’t introduce that bill, because after 35 years in Washington, he’s not willing to stand before the public and defend the crazy problems raised by his strange idea.

For example, would Sen. McConnell’s proposal allow a federal bankruptcy court to require a state to sell its assets so it could pay off creditors who provided public services or loaned the state money to build schools and roads?

That’s what happens in Chapter 7 bankruptcy, where a judge appoints a trustee to manage a debtor’s case, and the trustee sells the debtor’s assets and distributes the money to creditors.

Usually, the debtor gets to keep his or her house, so if Sen. McConnell doesn’t mind, maybe a bankrupt Kentucky could keep the State Capitol while the trustee sells off all the State Parks, or at least the resort parks where the lodges can become Marriott or Hilton Hotels – watch those rates go up.

Just selling assets would not come close to paying off the state’s debts, so a bankrupt Kentucky would have to take hundreds of millions of dollars from schools, roads, health care, State Police, and economic development. Since those programs are essential, state and local taxes would have to increase to pay for them, even if the programs are drastically reduced.

And once the state goes bankrupt, the price of future borrowing would go way up, as nobody would want to lend money to a bankrupt state unless they could charge a much higher interest rate. So, if Kentucky needs to build a new high school or road, the taxpayers would be on the hook for massive price increases.

All in all, state bankruptcy seems like a bad idea. However, if Sen. McConnell gets the ball rolling by introducing that bill, maybe he can explain how it will benefit taxpayers instead of leaving them bankrupt, too.

John Schaaf of Georgetown is a retired attorney, and he can be reached at John.Schaaf1975@gmail.com.

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