Battle in Congress brewing over money for state governments

As the US House of Representatives moves to approve a $484 billion bill to replenish a small-business loan program that also includes money for hospitals and coronavirus testing, the next funding battle in Congress will be for state governments hard hit by the pandemic.

Senate Majority Leader Mitch McConnell, a Republican from Kentucky, said states could "use the bankruptcy route" rather than receiving money from the federal government — a suggestion denounced by the governors of New York and New Jersey, two states pounded by COVID-19.

Current law prohibits states from filing for bankruptcy, although cities and other local governments can use Chapter 9 bankruptcy to restructure debt if allowed by their states.

US Treasury Secretary Steven Mnuchin said he is aware of concerns about the spiraling federal debt from the pandemic-related funding bills passed by Congress, but he said interest rates are low and the need to boost the economy during the coronavirus shutdown called for quick action.

"This is a war, and we need to win this war, and we need to spend what it takes to win the war," he told Fox Business earlier this week. "We are sensitive to the economic impacts of putting on debt, and that's something that the president is reviewing with us very carefully."

In an interview with The Wall Street Journal, McConnell said Congress should hit the "pause button" on future economic relief packages and consider the impact on the federal debt.

McConnell elaborated on the point in a radio interview and said the law should be amended to allow states to file for bankruptcy.

"There's no good reason for it not to be available," McConnell said.

He called the push for increased state funding "blue state bailouts", a reference to states that voted Democrat.

State aid from Congress would be on top of a $2.2 trillion federal package enacted last month that includes payments to individuals, expanded unemployment insurance and business tax cuts.

Representative Peter King, a Republican from New York, called McConnell's remarks "shameful and indefensible".

But the harshest criticism came from the Democratic governors of New York and New Jersey.

New York Governor Andrew Cuomo said McConnell's comment was "politically repugnant" and that it was "offensive" to call the request for federal money a "blue state bailout".

"You talk about one issue where you think you can get past partisanship and pettiness, and you talk about communities where people are dying and you say they are blue states. How am I supposed to reopen if you want me to declare bankruptcy?" he said on CNN.

New Jersey Governor Phil Murphy also condemned McConnell's proposal.

"Encouraging explicitly, almost hoping for bankruptcies of American states in the midst of the biggest healthcare crisis this country has ever faced, is completely and utterly irresponsible," he told reporters.

On Thursday, the US Department of Labor said 4.4 million people filed unemployment claims for the week ended April 18, boosting the total number to above 26 million since March.

"There were significant layoffs and furloughs of state and local employees during the Great Recession, and that is likely in this economic crisis as well," Jared Walczak, director of state tax policy for the Tax Foundation, a Washington-based think tank, told USA Today.

The budget crunch has begun in some cities.

Los Angeles plans to require city workers to take 26 days' unpaid leave to close a projected $600 million drop in revenue.

Detroit, Michigan, seeks to lay off 200 workers and furlough thousands more as tax revenue falls in the economic slowdown.

Dayton, Ohio, has furloughed about 25 percent of its municipal workforce and plans further cuts. Mayor Nan Whaley said the first round of cuts focused on nonessential workers such as those at recreation centers.