Mitch McConnell’s Logical Inconsistency

Dear Rich Lifer,

Senator Mitch McConnell has been grabbing a lot of headlines for his stance on the possibility of state and local government bailouts.

In case you missed it, he said the federal government shouldn’t look to provide “revenue replacement for state governments” nor should it worry about “solving their pension problem.”

Effectively, McConnell is saying no to municipal bailouts.

I happen to think he’s right.

Federal Gov’t SHOULD NOT Bail Out State Gov’t

Many state and local governments had no problem living high on the hog during the fat times. 

They did nothing to shore up their finances for the inevitable rough patch. And in the specific case of failing pension systems – which I’ve written about extensively – it pretty much boils down to a combination of poor planning and trading unrealistic promises for votes.

I realize this particular crisis is more acute than most.

However, consider the fact that some states and local governments are well prepared even for this type of black swan event.

As The National Review explains it:

“Irresponsible state and local governments are attempting to exploit the fear and disruption of the coronavirus epidemic to push off the consequences of their decades of reckless and culpably dishonest policies onto the federal government. This will inspire a great deal of conversation about ‘moral hazard’ and ‘fairness,’ but the fundamental problem is something else: Such a bailout would not work because it would not actually solve the real-world problems that threaten to cripple state and local finances.

“Contra Mitch McConnell, the Senate majority leader, this is not exclusively a ‘blue state’ problem.

“State and local governments are facing short-term financial problems that are tied to the epidemic and the imposition of social distancing, lost tax revenue prominent among them. With businesses forcibly closed and unemployment soaring, there is less money coming into state, county, and city tax coffers. Some states are better prepared for this than others: Wyoming maintains a ‘rainy-day’ fund that has socked away in it funds equal to 109 percent of the state’s annual government expenditures. Alaska has more than half a year’s expenditures tucked away, North Dakota 30 percent, New Mexico 27 percent. Most states have a good deal less, and some have very little: New York has only 3 percent, Pennsylvania 1 percent, and Senator McConnell’s home state of Kentucky less than 3 percent. Illinois, to nobody’s great surprise, comes in at 0.0 percent, no doubt from spending all its money on Chicago-style avocado toast.”

It’s one thing for Congress to throw short-term life lines. It’s another to expect it to solve the type of systemic financial problems that plague places like Illinois. There are other more appropriate routes that can be taken – whether higher taxes, lower pension benefits, asset sales, or even bankruptcy.

Workers kept pushing for more. Politicians kept promising more. Voters kept supporting the cycle. Investors kept loaning money.

No Different From Private Sector 

It’s not really any different than the private sector.

That’s why, in McConnell’s specific case, I don’t understand how the viewpoint on municipal bailouts jibes with some of the bailouts that he either proposed and/or supported for large companies like airlines and chain restaurants.

For example, we continue to get more information about just how many public companies took PPP money during the first round of the program and it’s pretty eye-popping.

As a recent CNBC article notes:

“More than 200 public companies applied for at least $854.7 million from the government program that was billed as emergency funding for small businesses without access to other sources of capital, according to data analytics firm FactSquared.

“That includes $126.4 million for three public companies affiliated with Texas hotelier Monty Bennett. One of those firms, Ashford Hospitality Trust, applied for $76 million in 117 separate loans, according to regulatory filings …

When reached by CNBC last week, several companies said they had no intention of returning the funds, claiming that they had limited access to other sources of money and the program would help them to pay their employees.

“The same goes for the three companies affiliated with Monty Bennett. 

“‘We plan to keep all funds received under the PPP, which were provided as a result of the application process and other specific requirements established for our industry by Congress,’ the Bennett-run companies said April 25 in a statement.”

Meanwhile, this piece from Forbes highlights the top 20 public companies that received PPP money, noting that many of them had tens of millions in cash and cash equivalents – as much as $263 million in one particular case – that could have easily been used to weather some of the immediate pain caused by the COVID outbreak.

None of the aforementioned covers other programs – like the airline loans – that were part of the CARES Act, either.

The Bailout Paradox

So we have already handed over hundreds of billions of dollars to entities that should have been adequately prepared for rough patches and had other forms of recourse ranging from existing cash on balance sheets to bankruptcy in the event of worsening conditions.

That’s bad enough, and I blame politicians like Mitch McConnell.

But the last thing we should consider now is handing out another trillion or two to states and local governments that have already been mismanaging their own finances for decades on end.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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