Magazine June 1, 2020, Issue

States of Distress

New York governor Andrew Cuomo speaks to reporters at the Javits Convention Center in New York City, March 24. (Eduardo Munoz Alvarez/Stringer/Getty Images)
Republicans should draw a line on federal aid

‘Federalism” is a word that does not appear in the Constitution, and perhaps it’s just as well. We are already too prone to oversimplify the complex relationships among the state governments and between them and the national government. The fact that the Constitution addresses aspects of the topic in scattered provisions, and sometimes only by implication, might limit that tendency. If the text used the term itself, our arguments about the relationships would dwell even more on the meaning of it than they already do.

The coronavirus epidemic has raised new questions and renewed old ones about how the federal government interacts with states. Democrats are accusing the Trump administration of leaving states to fend for themselves and — in at least thematic contradiction — of threatening to ride roughshod over them. Republicans are insisting on limits on aid to states and limits to the states’ authority to impose restrictions on people and businesses. Each of these positions has been rhetorically justified in the name of federalism, and the opponents of each have been slammed for hypocrisy about federalism.

The arguments about the power to set policies are the easiest to settle. Nothing in the text or history of the Constitution, and no statute, gives the president much authority either to close or open a state for business, let alone the “total authority” he has said he has. Attorney General Bill Barr, meanwhile, is quite right to say that if state lockdowns intrude on constitutional rights or on commerce among the states, the Justice Department may have to join lawsuits asking federal courts to intercede.

If states and localities single out churches for restrictions, as has happened in some places, it’s the federal government’s duty to intervene. There’s an argument that the First Amendment, properly interpreted, does not apply against states and localities, but that ship sailed decades ago, and Barr’s critics don’t want to bring it back. The critics worry that Barr will try to force states to comply with his preference to end shelter-in-place orders quickly. But he has neither said nor done anything to support that fear; he would need the federal courts to provide unlikely assistance for that project to succeed; and this concern is not in any case a valid reason for his department to let state violations of the Constitution stand.

The arguments about coronavirus aid from the federal government to states cannot yield such clear-cut resolution. The states need money: The virus is creating new demands on spending even as the recession it induced is causing revenues to plunge. While state rainy-day funds are generally in better shape than they were when the Great Recession struck twelve years ago, no state could reasonably be expected to have enough savings to cushion this blow, any more than businesses could. 

The case for federal help is strong. For one thing, the expectation of federal aid in a public-health emergency can encourage state governments to take action that has benefits for other states. We would not want a state to skimp on safety measures because of the expense and cause infections to spike in its neighbors. For another, state lockdown policies generally followed the guidelines of the federal government. And the states don’t have anything like the federal government’s capacity to borrow. Some of the limits on their borrowing are self-imposed, a matter of state-constitutional provisions, but they cannot be quickly loosened. We should not take the risk of mass layoffs of state employees in the middle of an epidemic and a recession, or of big state tax increases, while we wait.

What increasingly concerns Republicans, however, is that the current crisis will become an opportunity to solve problems that state governments have created for themselves. Most of all, they want to avoid bailing out underfunded state pensions. Over the years, states have promised retirement benefits to their workers without putting away enough money to pay for them. Private pensions have spent the last two decades lowering their projected returns; public pensions are generally planning as though it were still 1993. Their portfolios have been getting riskier even as the age distribution of their participants has been rising. The Federal Reserve estimates a $4 trillion funding shortfall. 

When conservative radio host Hugh Hewitt asked Mitch McConnell about the pensions of California, Connecticut, and Illinois, the Senate majority leader said that bailouts are off the table but that adding a provision to federal law allowing states to declare bankruptcy is a good idea. It is not a coincidence that the three states mentioned are reliably Democratic. By one measure of pension underfunding, five of the six least responsible states voted for Hillary Clinton in 2016, while five of the six most responsible voted for Trump. But the issue does not neatly divide red from blue states. The very worst on the list is Kentucky, McConnell’s home state, which hasn’t voted for a Democratic presidential candidate since Bill Clinton was on the ballot.

The overall partisan tendency, though, affects the way politicians think about state-pension bailouts. When McConnell’s office released his remarks under the heading of “stopping blue-state bailouts,” Democrats such as New York governor Andrew Cuomo retorted that his state sends more money to the federal government than it gets while conservative states such as Kentucky get more than they send.

Cuomo may have been under the impression that McConnell was condemning aid to states in general rather than making a narrow point about pensions. Much of the news coverage furthered that impression. If we are considering the pension issue, however, the pattern of “net recipient” and “net donor” states is irrelevant. New Yorkers pay higher federal taxes than Kentuckians, on average, because they also have higher incomes and the federal income tax is progressive — something Cuomo supports more than McConnell does. But the fact that New Yorkers have higher incomes is not a reason for them to receive more federal transfers.

A federal bailout would encourage further future irresponsibility on the part of states. It would also be unfair. Teachers in Wisconsin, where pensions have been managed relatively well, should not have to pay higher taxes because politicians in Illinois made unrealistic promises. But a state-pension crisis could create a formidable bipartisan coalition for a bailout, with much of Wall Street joining public-sector unions to demand one. A few days before McConnell made his comments, the president of the Illinois senate had sent Congress a letter asking for $50 billion in aid, putatively because of coronavirus-related needs. Ten billion was to go to the state’s pensions.

That’s why McConnell is thinking about changing federal law to let states go bankrupt: to deal with the long-brewing pension problem, not the coronavirus hit to state finances. With a new bankruptcy provision in place, a state with more claims on it than it can pay would have the option to sort them out in federal court. Bondholders might well get back less than they had hoped, and state employees could see their benefits accrue at a slower rate or even see the benefits they thought they had already earned pared back. The availability of this option might reduce the pressure for a bailout. David Skeel, a law professor at the University of Pennsylvania, has argued that a bankruptcy option would also promote better decision-making by states. Unions will want more pension benefits pre-funded if the alternative is losing some of them in bankruptcy.

Opponents of the bankruptcy idea say it is an unconstitutional infringement on state sovereignty. But the Supreme Court has upheld federal bankruptcy provisions for subdivisions of states since the 1930s. And the scenario that bankruptcy is designed to avoid, a federal bailout of state pensions, would itself be a major and unprecedented change to federal–state relations.

A few proposals have been made to help state governments through the coronavirus epidemic without subsidizing their spending more generally. Yuval Levin, my colleague at the American Enterprise Institute, suggests dividing the states’ requests into three categories. The federal government would provide states with funding for the direct costs of the response to the disease, such as health spending, and for the added strain on unemployment insurance. It would give states loans on favorable terms to make up for their revenue losses. (Because they would be loans, they would minimize the subsidization of high-tax states by low-tax states.) To fix state-pension shortfalls, Congress would either create a bankruptcy option or at least couple aid with conditions such as the states’ adoption of normal accounting standards.

Conditions on the states may have some appeal to federal officials because they seem less radical than bankruptcy. But the constitutional problem could be worse. In a 2012 decision, the Supreme Court struck down a provision of Obamacare that required states that accept Medicaid funding to expand the program, saying the condition was unduly coercive. That decision did not specify when conditions cross the line of acceptability, however, and the constitutional text does not include an answer.

In devising further responses to the crisis, federal officials will have to weigh the risks of spending too little and spending too much — just as state officials will have to weigh those of asking for too little and asking for too much. The political wrangling will be intense. With the Constitution silent on most of the matters under dispute, those engaged in it will have to determine how best to achieve the Founders’ great end: effective, limited, and accountable government.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

In This Issue

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Letters

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