What Would It Mean If U.S. States Went Bankrupt?


The coronavirus pandemic is
hitting America hard. Countless Americans are being advised to
stay home as much as possible. And governments are telling nonessential
businesses to stay closed. But governments themselves are
also taking a hit. Much of the economy has either slowed
down dramatically or ground to a halt. And with all that lost
economic activity come the tax revenues governments depend on to pay
for their massive budgets. On April 21st, Senator Mitch McConnell said
he would support the idea of letting states declare bankruptcy. Later, he walked back his comments. But the episode resulted in
a firestorm of media commentary. “Come on, man, that is
completely and utterly irresponsible. This is no time for
bankruptcies and wishing bankruptcies.” “The most un-American, uncharitable, ugly
statement of all times.” Of course, there are reasons to be
concerned about state’s fiscal health. “I think the big difference between this
downturn and what we saw in the Great Recession or the recession of 2001,
2002 is the speed with which it came on and the severity
with which it came on. That really makes it unprecedented
from a credit standpoint. States entered this in a stronger position,
but they’re going to have to use all of the tools that they
have available to them to maintain their credit quality through this.” An array of industries have been badly
hurt since the coronavirus began to spread. Travel and
tourism have tanked. Stores are shuttered and restaurants are
relying on takeout and delivery to try to stay afloat. As all that business dries up, so do
the sales and tourism taxes that go with it. Some states, such as
Washington, Arizona, Nevada, Louisiana, and Tennessee all rely heavily on
sales tax for their revenues. A number of states with high sales
taxes collect no state income tax at all. But income taxes are
also taking a hit. A staggering 30 million Americans
have filed for unemployment benefits. The federal government has also extended
the tax deadline from April 15th to July 15th, and many states
have adjusted their own deadlines accordingly. That means that for the next
three months, they will have to do without whatever state income
tax revenue would otherwise remain. Meanwhile, states have to
keep paying for services. Roads need to be maintained. Government workers still need
to be paid. And governments are now also
saddled with medical and unemployment expenses. There could be more hurt
ahead for city and state finances across the U.S. By law, municipalities such as
cities can declare bankruptcy. But states cannot, and
they never could. However, some in the legal world
have argued that state bankruptcy should be a viable option and it’s
a better alternative to bailouts. University of Pennsylvania law professor David
Skeel is one of them. He and fellow U Penn professor
Robert Inman co-authored an editorial on May 5th arguing that McConnell was right
to say that emergency aid from Congress should not be a bailout for
state deficits that have nothing to do with the pandemic. They argue that
Congress should act as an insurer of last resort and only hand out aid
to states for losses incurred during the pandemic, and not
for pre-existing problems. Skeel has argued in the past that
states in deep financial trouble should be allowed to file for bankruptcy. Inman is skeptical. But it is clear that McConnell is
not the only person who has expressed support for the idea. So legally, why can cities, towns,
or school districts declare bankruptcy when states are unable to? Since 1937, the federal bankruptcy
code has allowed municipalities to declare bankruptcies. Municipality is a
broad term that basically includes all kinds of subdivisions of states,
such as towns, cities, and counties, but also school districts and some
government organizations within a state that collect revenue but don’t cover a
geographic area, such as a bridge authority. But the contracts
clause of the U.S. Constitution prohibits states from impairing
the obligation of contracts. Subsequent Supreme Court decisions have
generally supported the notion that states cannot refuse
to pay their debts. “So in our constitutional system of
federalism, there’s really only two sovereigns. There’s the sovereign United
States government and there’s the sovereign state governments. There’s no such thing as
a sovereign city government. And so the idea is that the United
States has been thought not to be allowed to do things that would impair
the ability of the states to function as governments. But there’s no similar principle that
would prevent the federal government from doing things that would impair the
ability of cities to function as governments, because cities are not dual
sovereigns the way states are.” So for states to even legally
allow themselves to declare bankruptcy. Congress would have to pass a
law adding language to the federal bankruptcy code that explicitly allows
states to declare bankruptcy. Then individual states would have to each
pass a law that allows them to declare bankruptcy. Finally, the Supreme Court would have
to determine that all that legislation does not conflict
with the Constitution. So if a state declared bankruptcy, then
necessarily that means that some of their creditors would not get paid in
full what the state owes them. And so those creditors would take that
case to the Supreme Court and argue that it was unconstitutional for the states
to be relieved of the debt to the creditors. So that’s how we
get to the Supreme Court. That would be the last
step in the process. So if it’s even possible, it’s not a
process that would be likely to happen quickly. The question of whether states
should be able to file bankruptcy is a thorny one. And there are some
critics of the idea that say allowing states to file for bankruptcy would,
for example, raise the risk of lending money to states. It could also put the interests
of creditors against the interests of states. But the idea
does have support. David Skeel, the University of Pennsylvania
law professor, made the case for letting states go bankrupt when the
country was in the depths of the recession, spurred by the
financial crisis of 2008. At the time, several cities and
states were in deep financial trouble, which some, such as Skeel,
attributed to runaway expenses. “Allowing states to file for bankruptcy
would save taxpayers a great deal of money,” he said. Such laws could
be squared with the Constitution and could be structured in a way
that ensured bankruptcy courts did not override the states abilities to
pass their own laws. “Anyone who proposed even a decade ago
that a state shouldn’t be permitted to file for bankruptcy would have been
dismissed as crazy,” Skeel wrote in 2010. “But times have changed.” “States always have the ability to
pay their debts by raising taxes. There’s some views that would say that’s
not a good thing to do. And then states also have the ability
to pay their debts by borrowing. But there’s often even more consensus that
that’s not a good thing to do. And a lot of states actually operate
under their own state, a balanced budget amendment which are
in their state constitutions. So states could change those. There’s no federal requirement that
states balance their budgets. But a lot of states have
imposed that requirement on themselves. And so if you think that a
state should keep a balanced budget, it shouldn’t raise taxes and it doesn’t-
And the state doesn’t have enough money to pay all its bills. Then bankruptcy starts
looking attractive. Right. So I think there’s some there’s
some people who want to take those other two options off the table. And then they say, well, if you’re
not going to contemplate those other two options of raising taxes or
borrowing money, then bankruptcy is the most orderly way to figure out how a
state is going to pay pay some bills if it doesn’t have enough money
to pay all of them. But I think, you know, people on
the other side of that partisan divide have not been as opposed to
states sometimes raising taxes or sometimes borrowing. And those would be alternative
ways of getting the bills paid without really requiring
the creditors. But the situation prompts another
financial question: whether coronavirus is even putting states in a position
where they would need to declare bankruptcy if it was a legal option. And none of the research from the
three largest credit rating agencies in the U.S. suggest any states are in
danger of defaulting on their debt obligations. “Nearly all of the states
are in very strong credit position. And that’s not even something that
they need to think about. There certainly would be constitutional
issues of the federal government somehow overseeing state finances. But it’s not an issue.” In fact,
states tend to have pretty high credit ratings. “So two-thirds of our states
are in our two top rating categories. And that really reflects the
broad range of powers that states have over their finances. They determine what taxes they have. They determine what tax
rates they have.” The reason is that despite the trouble
they face, states have a pretty high degree of financial flexibility. They tend to have
very large tax bases. Of course, that varies depending on the
size of the state’s population and the health of its economy. But overall, their sheer size gives them
a deep well to draw from. They also have two
fundamental levers to pull. They can raise taxes
and cut spending. States can push some expenses
down to local governments. Aside from that, they
can also issue debt. State debt issuance activity has been
relatively flat over the last decade. “States generally only borrow
for capital purposes to build schools, jails, essential
government facilities. They don’t really borrow
for operations overall. They’re in a strong position
as it relates to debt. We might see some states do
deficit financing through this crisis depending on how bad
the revenue situation is. That is atypical for the sector. But it is another option for states
that also generally have very good market access.” In fact, many states
are not out of cash yet. The financial recovery of the last 10
years or so has allowed many states to build up rainy day funds that can
be quite large and hold some of them over for a while. In mid-April,
the median available state governmental fund was 8% of fiscal 2018 year
spending, according to Fitch, one of the three major credit rating agencies. “25 states had reserve levels high
enough to cover the largest revenue decline they had
had before coronavirus. And we, of course, don’t expect that
states will solely solve their budget problems with reserves, and coronavirus
probably has created revenue problems that their reserves
can’t handle altogether. We expect to see states take
structurally-balanced solutions, but they have significant powers over
their finances.” As of April 30th, credit rating
agency Moody’s had not downgraded any states because of
the coronavirus pandemic. It had, however, lowered outlooks
on a few states. A lowered outlook means there could
be some downward financial pressure on states, and it also means that they are
at a greater risk of a downgrade in the future. In early May, Moody’s
lowered its outlook on all U.S. states from stable to negative, citing
uncertainty as to when life will return to normal across the country. That does not mean states are all going
to be downgraded, but it does mean the economic downturn has accelerated, and
there are rising state revenue headwinds, especially in sales
and income taxes. “That sector outlook really reflects
that the operating environment for states is much weaker than it
was going into the coronavirus crisis. The employment situation
has weakened significantly. Consumer sentiment has
weakened significantly. Spending has weakened significantly. And all of that is having
negative impacts on state tax revenue. We estimate that in the current fiscal
year and the next fiscal year that starts July 1, that state tax revenue will
be 15% lower than it was in the last fiscal year.” The three states that have Moody’s
lowest credit ratings are Illinois, New Jersey, and Connecticut. All three have deep structural
financial difficulties that pre-date the pandemic. Of the three, Illinois is
by far in the worst shape. “There are two states in particular,
Illinois and New Jersey, that had pre-existing credit conditions coming
into the coronavirus crisis. Those two states have very high fixed
costs for debt service pensions and retiree health care relative to their
revenue compared to other states. That just limits their financial flexibility and
how they will be able to manage through this. That contrasts sharply with triple-A rated
states like Utah or Tennessee that have very low fixed costs. And that just gives them a lot of
runway to be able to manage through this crisis.” Credit rating agency Standard and
Poor’s lowered its outlook on New Jersey April 29th, in
part because of coronavirus-related effects. The state still has an A-minus
rating, well within investment grade. However, Fitch downgraded Illinois to
BBB-minus, the lowest investment grade, on April 16th. But even for states in relatively good
shape, there are a number of concerns on the horizon. “The problem for state finances probably
really started in March, when social distancing and quarantine policies really
began to have an impact of economic shutdown. And that’s had a very sudden and
severe impact on sales tax revenues, in particular because people are really
only consuming the essentials right now: groceries, pharmaceuticals,
and the like. And those largely aren’t taxed. Sales taxes for states are
about 30% of overall revenue. But in some states, that’s
as high as 70%. Despite a record $115 billion dollars
in aggregate cash reserves on hand for all states combined, few will be
able to cover their projected tax losses with cash, Moody’s said
in a recent report. The agency expects coronavirus will reduce
state tax revenues by $160 billion dollars from fiscal year
2019 to fiscal 2021. Fiscal 2021 tax revenue is expected to
be $200 billion dollars less than governments would otherwise collect if there
were no downturn and moderate growth. Even if an upturn were to
begin in 2022, Moody’s base case projection doesn’t see state tax revenues
returning to 2019 levels until 2024. “Achieving revenue consistent with a
moderate growth path is even more out of reach,” the agency said. Arizona, for example, finished 2019 with
a $1 billion dollar surplus. But a recent report from the
state’s Joint Legislative Budget Committee projected a $1 billion dollar deficit by
2021, due in large part to the effects of the virus. There are other red flags popping
up around the country that credit agencies are watching. Hawaii’s State Council on Revenues
recently lowered the general fund revenue forecast by about $300 million
dollars through the next fiscal year, primarily due
to coronavirus effects. In the state of Washington, the
Department of Health asked for an additional $100 million dollars from the
state legislature to combat the virus. In California, San Francisco’s
city controller recently reported sharp declines in hotel occupancy and
airport traffic, and he estimated city revenue losses in the
tens of millions of dollars. 2019 was a record year for tourism
in the city, according to the San Francisco Travel Association. Tourism brought in $819.7 million dollars in
taxes and fees for the city that year, a 6% increase over 2018. About 51% of that amount
came from hotel taxes alone. The Federal Reserve established the
municipal liquidity facility to help state and municipal governments deal
with cash flow pressures. The facility will purchase up to
$500 billion dollars of short-term notes directly from U.S. states, including
the District of Columbia, U.S. counties with a population of at
least 500,000 residents, and U.S. cities with a population of
at least 250,000 residents. The federal government has set aside
one $150 billion dollars for state and local governments through the CARES Act,
and there will also be an additional $10 billion dollars through
Medicaid per fiscal quarter, much of which is likely to be
eaten up by virus costs. There is also a $45 billion dollar
Disaster Relief Fund and $25 billion dollars for mass transit. But state and local governments are
asking for another $750 billion dollars from the federal government, five
times the enough allocated in the CARES act. And there is no clear idea of when
case numbers will drop low enough to allow the country to
get back to work.

100 thoughts on “What Would It Mean If U.S. States Went Bankrupt?

  1. What about the evictions bring issued under the Pandemic!!! If you can’t find a job and are not receiving any assistance… I guess we will become the land of the homeless!!!

  2. For those that didn't know and don't think it's possible, the US Govt declared bankrupt back in 1933.
    https://famguardian.org/Subjects/LawAndGovt/LegalEthics/Corruption/USGovtBankrupt.htm

    https://www.youtube.com/watch?v=HlA9OnuV1eU

  3. State governments are corrupt and evil – their big cost is grotesque salaries and pensions that they coerced from taxpayers to enrich themselves. There should be issued remuneration caps, capital recovery and jail sentences.

  4. It would mean that states like NY that have been completely responsible LONG BEFORE COVID-19 would need to be responsible and not shift their mistakes over to the rest of the nation to fix. Um, hell NO!!!

  5. Trump just stated he is thinking of defaulting on t-bill interest payments to China. This is not bankruptcy, but it is maybe even more serious. Dollar could plunge; American reputation would tank.

  6. There's NOTHING WRONG about ddclaring bankruptcy, for as long as the President hang those corrupt people that did it! The President is a well-known businessman and he knows it's only ''chicken feed'' easy for him to put America back on its feet. He's the greatest and a blessing to you ''America'' and he needs you to participate in making America great again. God bless you all. From Cebu Philippines ✌🖐🤞👌🤘❤

  7. BANKRUPT…. HELL NO .. ADJUSTMENT OF THIER BUDGET SHOULD BE MANDATED….THE STATES THAT HAVE PROBLEMS APPEAR TO HAVE MADE NO ATTEMPT WHAT SO EVER. FORCE THEM TO OPERATE AT A MINIMUM UNTIL THEY ARE OUT OF THE RED !

  8. Boys and girls we control the world the economic world it's nothing more than a illusion to lead you to believe in a sense of order. But the reality is much darker. We make money and shatter economies on the daily and this is nothing more. This is why the government needs to get their head out their asses and use the print how it was intended.

  9. I would have loved to watch this to the end, but the annoying background music made me nauseous.

  10. interesting that NY and NJ objected, they where bankrupt before the virus due to Liberal corruption.

  11. Reduce the salaries of all politicians. Fire the doctor who acted like Howard Hughes who died earlier than most anyway.

  12. No problem, we made China so rich over the decades, we can borrow from them. (We are so screwed!)

  13. I really like this guy's voice… He's my favorite of all these reporters making these CNBC YouTube reports

  14. Don’t worry; President Trump will do “magical things “ to make an economic recovery in a short time!

  15. Russia,China and Iran have partnered to destroy the American oil dollar. Whats being said here is smoke and mirrors. Like saying the stock market is the true indicator of how our economy is doing.

  16. I'm fine with the Federal Government helping states impacted by COVID. BUT, a lot of the states that are crying for more money louder than everyone else (California, New York, Illinois, etc.) had MAJOR pre-existing financial issues that were largely self-inflicted. I was seeing articles saying California might "go under" as far back as November 2019. COIVD is not a "get out jail free" card.

  17. America is rich with Weapons Of Mass Destruction. A country famous for Merchant for Killing Machines.

  18. Wonder why one state can t get all the information from all the other states that make that state be so much better. If it works good use that first then keep going to see what works for the next state and so on. No Brass keep up with that?

  19. U.S behave like it is only country in the world which has hit with this virus. Every country in world is struggling with this virus. This shows how U.S is hollow inside while they show they have world dominance.

  20. Country in 100's of trillions in dollars of dept (before Covid): "No we're not in danger… Well just keep raising taxes"
    Citizens: >:/

  21. They already found a solution by raised the social security rate on working Americans . Billing working people is not right, cut the democrats and Republicans pay to help the country recover . Don't tax the people moving the country forward.

  22. This logic of letting states go bankrupt due to a pandemic is completely different from con artists Wall Street Bankers doing illegal activity.

    This is just a partisan work over, where red states will magically get bailout by McConnell and Agent Orange, while blue states will be extorted based on partisan politics. This video is ignoring this.

  23. What's to prevent a state from opening their own state bank and just add zero to a digital account on state debts and stay solvent?

  24. The reason these states are in financial trouble though is not because of the coronavirus. They already had significant financial issues already. A big thing that states would do is give out cost of living adjustments in pension funds as high as 8%. You can’t guarantee an 8% rate of return it’s just not possible. We should not be bailing out the states stupidity.

  25. you can say something going wrong when you hear a politician start his Sentence with : come on man. 😀
    Whether it is right or not

  26. The Chinese really destroyed our economy without firing a single shot, gotta give credit to our new Chinese overlords that was a pro gamer move

  27. Here's a thought: widespread legalization and therefore taxation of marijuana. If you look at it from purely a financial point of view it makes a lot of sense, and if you look at it from a moral point of view, alcohol is a much more debilitating drug yet has been legal for most of our country's existence. It's time the United States as a whole embraces it as people are going to smoke either way, so you might as well make it a bit easier for them to while making up some of the money the states have lost because of the coronavirus. It's a win-win for pretty much everyone.

  28. The cities in crisis have put fighting imaginary racism and empty virtue signalling above fiscal responsibility. Sanctuary cities thumb there nose at the law. They've been more concerned with racism against the Asian Americans (with no evidence) then with China's actions or fighting COVID. If they aren't going to change their ways there's no point in bailing them out. It won't last.

  29. McConnell is the most unqailified and unrealistic person in government I have ever seen. Horrible

  30. .. time for them to fail. – out of death comes new-life – thats a natural law … ill trade you , remove dumb laws statewide well pay your salarys … wait , we already do that – maybe we should let them fail .

  31. Most countries have unsustainable debt (citizens, corporations and governments). So they are already bankrupt. I have come to the conclusion that the way the coronavirus was dealt with around the world could actually lead to the end of civilization…

  32. They want to take state employees pensions. They will steal it all and leave us nothing then they’ll give it all to billionaires.

  33. 4:33 great …dad is having another live stream…..let me interrupt is too late…I've walked too far already

  34. Liberal states have already been bankrupt, they owe billions in pension funds. "You can't buy your way out of debt"… Abraham Lincoln

  35. Hey CNBC, what about the effect bankruptcy would have on a state? Seems like an important element for deciding if it's a good idea or not. Would government services be sold off to the highest bidder? Would Pensions and healthcare be suddenly cut off? Would union contracts be abolished as wages depressed? I know that's McConnell's wet dream.

  36. It won't go bankrupt. The defense contractors will continue to get paid, as well the Republican lizards that enable and profit from them. The rest of us will starve. It's time for a revolution.

  37. I'm in my 60's and have to live on 951.00 a month while I take care of my 84 year old mom and my adult disabled son who gets a lot less than me. Between the 3 of us we hardly keep the lights on.

    The stimulus package was a money grab for big businesses and the government. States have captured over 7.6 billion of the 1200.00 tax rebate checks. That's why it went in as a tax check. That's the only way government could get it back and they took it from people on the verge of homelessness. If they read the bill and voted it in they either didn't read the whole bill or they knew exactly what they were doing. Greed will be the downfall.

    What were the Democrats trying to push through, an 1800 page bill? The bible is only 1008 pages and gives instructions on life from birth to death lol.

  38. New York and California go bankrupt it's their fault for not managing your money if I don't make my mortgage payment it's my fault that I lose my house wake up people why you going to use my tax dollars to bail these states out it's unfair

  39. It very possiable with the billions they stold 38 million in two weeks. All fools people. Who still wants a free world?

  40. I am a first responder on a emergency response team for the the fire Dept, I am highly upset and disappointed in many who don’t follow restrictions with little to zero care for human life. I don’t understand why our government has not made the effort to really enforce rules and regulations to keep the stay at home order as something serious. Me and my team our out there on front lines to assist in such things like aiding in various food banks . Doctors and medical staff putting there lives at risk so others don’t have to. This is why I get so irked at people who care less .

  41. Was FDR's proposing 100% tax on income over 200 thousands that eventually got settled for 94%?. In part peole got make work projects that the americans brag about to this day!. Conveyor belt technology works only for the stuff that it shuttles through. V shape recovery will only work for China. All that is required is millions of china-dolls to sit at the assembly bench.

  42. WOW !
    In these jittery times, citizens of the world with no specialist financial knowledge DESERVE such clarity and reassurances.
    Please see if you could also cover my old Europe. Over here it feels as wild as it was back then in the Far West. 😆😉😂
    And after that, please do not forget the Far East. From a distance it feels like a ONE MAN BAND. 😈😂😉
    THANKING YOU 😊😃☺

  43. Only debts incurred after the change in the constitution, that allows states to go bankrupt, should be able to be purged, not debts incurred before the change in the constitution.

  44. then they would create something called the federal reserve system.. where they have private bankers make money out of nowhere and give it to the politicians to spend.. oh.. wait.. they already did that.. america will never be bankrupt while the printing presses still work.. probem is that fed reserve note is linked to debt.. unlike the greenbacks that have no debt.. fed resrv system is the greatest threft in worlde history.. a scam..

  45. Illinois is trying to create a worse catastrophe thinking someone will bail them out if only they can make it bad enough. Probably taking advice from Rahm Emanuel.  It's how he ran Chicago.

  46. End the lockdown now and let people go back to work COVID 19 hype is the liberals way of trying to destroy the work of president Trump

  47. This is what happens when you invest your money into the CCP and their CCP Virus that is causing the pandemic. If you want to sue someone and get your state money back, LOOK STRAIGHT AT THE CCP (THE CHINESE COMMUNIST PARTY). WIN OR LOSE, NEEDS TO START TAKING IT OUT OF THE CCP HIDES!!!
    NO NEED BAILOUT, SEIZED ALL CCP ASSETS IN AMERICA AND COMPANIES WHO SUPPORTED THE CCP. Oh look a Harvard professor was helping China out Watch the news for your self. https://www.youtube.com/watch?v=4JxM7lauNj8
    Send all your states bill to the Chinese consulate office address in Washington dc or help file the class action law suit againist the CCP.

  48. We the people will come back working. To handle the expenses is for the American people to assist the hurting families.

  49. The Liberal's are in charge of the Blue States and they shouldn't be because they are the worst business people on the Planet. Liberal's Steal Everything from taxes to payroll checks. They steal Police, Fire, and Sanitation Department's. Not including the Ridiculous money given to the illegal Alien Criminals.
    Stay Bankrupt or get Rid of Sanctuary Cities and that would end most of there finical problems. The other problem is get liberal's out of office

  50. I would love to see a chart, Showing the monthly Burn rate for each state, And compare that to each states estimated rainy day fund size.

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