Financial Aid to Struggling States Is Next Big Congressional Battle

WASHINGTON — With congressional approval of the latest emergency pandemic measure sealed on Thursday, the focus is quickly shifting to an escalating battle over whether Congress will provide hundreds of billions of dollars to states staggering under the costs of the coronavirus outbreak.

Anxious governors on the front lines of battling the pandemic have been clamoring for more federal help, saying their budgets are being stretched to the breaking point and their revenues are collapsing as they pour resources into health care while their economies are shut down. But the latest measure contained no new state aid, as Republicans resisted extending help even as state officials described their situations as increasingly dire.

“Many states are already reporting precipitous declines in revenues that fund state services in health care, education, public safety, transportation and other vital programs,” members of the National Governors Association wrote to congressional leaders this week. “States and local governments need robust support from the federal government as we navigate the response to this pandemic and to help foster the economic recovery that is ahead.”

Senator Mitch McConnell, Republican of Kentucky and the majority leader, alarmed and angered state officials on Wednesday when he said he wanted to approach the next round of pandemic legislation more deliberately. He said he was opposed to shipping money to state governments if they were going to apply it to fiscal problems unrelated to the pandemic, such as shoring up underfunded pension plans for public workers.

Rather than looking for handouts, Mr. McConnell said states, which shared $150 billion allocated in previous pandemic legislation, should consider filing for bankruptcy. His aides threw fuel on the fire in a news release that said the Senate leader was opposed to “Blue State Bailouts,” suggesting it was Democratic-leaning states that were seeking the money to take care of problems caused by fiscal mismanagement.

Those comments prompted a sharp backlash, including from Gov. Andrew M. Cuomo of New York, a Democrat, who lashed out at Mr. McConnell for a second day on Thursday.

Mr. Cuomo has consistently said that federal funding was desperately needed to get the state back on its feet and seemed gobsmacked by the concept that it should even consider declaring bankruptcy, noting New York’s position as the nation’s financial services center.

“That’s how you’re going to bring this national economy back?” asked an incredulous Mr. Cuomo, who called Mr. McConnell irresponsible and reckless. “You want to see that market fall through the cellar? Let New York State declare bankruptcy.”

In a virtual interview sponsored by Politico, Gov. Larry Hogan of Maryland, a Republican who heads the National Governors Association, said he expected that Mr. McConnell would come to regret his remarks and noted that the Trump administration had been supportive of state assistance.

“I’m hopeful that we are going to, between the administration and the 55 governors in America, including territories, we are going to convince Senator McConnell that maybe he shouldn’t let the states go bankrupt,” said Mr. Hogan, who said his state would soon face a $2.8 billion shortfall.

President Trump gave ambivalent signals at his White House briefing on Thursday, suggesting that he might be open to offering aid to the states, but also saying, “It is interesting that the states that are in trouble do happen to be blue.” He singled out Illinois, and said many states had been in financial trouble long before “the plague.”

States are facing severe financial strain, as sales tax revenues dry up amid quarantines that have shuttered restaurants, movie theaters, gyms and nail salons. That pain has been compounded by the number of people losing their jobs and filing for state unemployment benefits. Another 4.4 million people filed for unemployment on last week and, while the federal government is kicking in an extra $600 per beneficiary, states must pay the bulk of unemployment benefits using trust funds that are already running low.

“Most state trust funds are underfunded for this crisis,” said Jared Walczak, the director of state tax policy at the Tax Foundation. “It’s hard not to be. The magnitude of this crisis meant that very few states were prepared.”

At least three states — California, New York and Ohio — are expected to deplete their trust funds within two weeks, with Kentucky, Texas and Massachusetts close behind. Once those funds run out, the states can borrow money from the federal government, but must repay it within two years.

Republicans on Capitol Hill say they believe Mr. McConnell, who opposed new state aid in talks that produced the most recent measure, was trying to reassure restive conservatives that he would not give easily on more funding in upcoming talks after Congress has already allocated about $2.7 trillion in deficit spending in response the emergency. But he faces significant obstacles if he intends to block the aid, and most see that as an unlikely outcome given the extent of bipartisan support for more state relief.

Not only do Democrats in the House and the Senate strongly support state aid — it was one concession Democrats were unable to wring out of Republicans in the latest round — but many Republicans have made it clear they do as well.

Several have signed on to bipartisan bills and letters calling for the aid. Senator Bill Cassidy, Republican of Louisiana, has joined Senator Robert Menendez, Democrat of New Jersey, in drafting legislation providing $500 billion sought by the states.

After Senate approval of the legislation on Tuesday, Senator Rob Portman, Republican of Ohio, called for shoring up the states as well.

“I believe we need to do more to help state and local governments affected by this crisis, and I believe the next package should provide additional assistance,” he said, also calling for increased flexibility from the administration on how states can spend the money.

Lawmakers say the latest round of funding could again run out in a matter of days, opening the door to calls for another rescue measure and beginning the struggle over aid to the states in earnest.

While many Republicans back the state relief, top aides said that most would join Mr. McConnell in balking at the idea that it could be applied to a pension bailout and that a compromise could include strict prohibitions on how the money is spent. A top state lawmaker in Illinois last week included a request for $10 billion in pension relief in the state’s appeal for federal help, though the problems long preceded the pandemic.

Many state and municipal pension systems have been underwater since the dot-com crash of 2001, when much of their funding from the booming 1990s melted away. Their problems worsened substantially during the market crash of 2008. Investment losses that year and in 2009 prompted officials in a number of states to attempt pension overhauls in the hope of making their plans sustainable. They were promptly sued by retirees and public workers’ unions, who cited state laws and constitutional provisions that make it illegal to tamper with public pension plans.

The pension problem is not unique to red states or blue. Illinois, a steadfast Democratic stronghold, is seen by experts as the state with the most intractable pension problems. But in Kentucky, Mr. McConnell’s home state, the pension system is in nearly as grave danger as the one in Illinois.

Mary Williams Walsh and Jesse McKinley contributed reporting.