Chicago City Wire

Senate Majority Leader Mitch McConnell said the federal government is not in the business of rescuing states from their own financial errors.

McConnell (R-KY) has proposed states that cannot meet their obligations declare bankruptcy. That has drawn a mixed response, with many Republicans agreeing with him while most Democrats criticize him for the suggestion.

Jeffrey Carter, a veteran angel investor and former Chicago Mercantile Exchange board member, co-founded the venture capital firm Hyde Park Angels and the financial technology startup company West Loop Ventures.

The Group of Seven nations—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—have sought his counsel.

“I do agree with McConnell,” Carter told Chicago City Wire. “Why should taxpayers from states that are well run bail out others? We have a republic, not a ‘community.’ States compete. This reflects that.”

The dramatic economic downturn linked to the COVID-19 pandemic has states facing huge budget shortfalls, with estimates ranging up to $650 billion over the next three years.

They received some assistance from the $2.2 trillion CARES Act, which provided $150 billion for state and local governments. But that money was quickly absorbed by cash-starved governments, eager for any new revenue source now.

States are calling for another $500 billion while local entities said they need at least $250 billion.

On his blog, Points and Figures, Carter explained why he opposes federal windfalls for states.

“My home state governor JB Pritzker (D-Madigan) told a whopper,” he wrote. “Not just a whopper, but a deceitful lie. He said that the Illinois budget would be balanced if Covid 19 hadn’t happened. Illinois has been run by the Democratic Machine for over two decades. The reason the budget is so screwed up is that the state caters to public sector unions. Period. Illinois has roughly 110,000 public sector employees making over $100k per year—and by the way none of them lost pay nor were they furloughed during the shutdown.

“There should be no quarry given from any part of the Federal government when it comes to state finances,” Carter wrote. “I was dismayed the Fed stepped in and helped Illinois. Let the bond market be the disciplinarian. Congress ought to pass a law that allows states to go bankrupt.”

On April 22, McConnell said he will not support these “blue-state bailouts,” saying most of the outcry comes from states traditionally governed by Democrats.

Kentucky Gov. Andy Beshear, a Democrat, rebuffed his senior senator’s idea.

“I hope those comments were off the cuff,” Beshear said on CNN. “I hope they were in reference to something else because bankruptcy for a state would be disastrous.”

New York Gov. Andrew Cuomo, a Democrat, lambasted McConnell and said it was an exceptionally bad idea.

On April 27, President Donald Trump weighed in, saying he could not support bailouts for “poorly run states” but saying he would be willing to discuss options.

While politicians posture and bicker, Carter said it would be a good fit for Illinois.

“Illinois is already insolvent,” Carter said. “Bankruptcy would give it an option it doesn’t currently have. It is the only way out.”

That doesn’t mean he thinks it will happen, not with Gov. J.B. Pritzker and House Speaker Mike Madigan in charge of the state. They are calling for more spending, raises for state employees and no reduction in state spending despite the COVID-19 downturn.

Pritzker said the the state is facing a shortfall of more than $7 billion in the next two fiscal years. Yet he has said there is no discussion of state spending cuts or delaying or suspending pay raises for state employees, because they were promised during contract negotiations. That has Carter rolling his eyes at the chance of real change, such as declaring bankruptcy.

“Politically, this idea has zero chance in Illinois,” he said. “Not only because Democratic machine politicians owe public sector unions and can’t kill that constituency, along with breaking up their patronage arms, but many compliant Republicans won’t sign on and would rather get a small concession from Madigan rather than blow up the system.”