by Jennifer Burnett
Indiana Gov. Mitch Daniels knows a fiscal storm is brewing. His state has been forced to borrow billions from the federal government to keep cash flowing to the jobless, and the bill has come due.
“There’ll have to be a change. We can’t continue with some of the lowest premiums and the highest benefits in America. And that’s why the system was leaking money when we were at full employment. And it’s leaked a lot of money since we have high unemployment. So, yes, it’s gonna have to change from both ends,” Daniels said at a recent press conference.
In Indiana, the unemployment rate has hovered around 10 percent over the past year, and the state has had to borrow more than $1.8 billion from the federal government so it could continue to pay benefits. The Indiana General Assembly has taken steps to help bring that borrowing under control—by voting to increase unemployment insurance premiums and the taxable wage base in 2009—but lawmakers delayed those changes from taking effect until Jan. 1, 2011.
Interest Now on Borrowing
Indiana is not the only state experiencing problems funding its unemployment programs. At the end of November 2010, 31 states had borrowed more than $41 billion from the Federal Unemployment Account. Thanks to a clause in the federal stimulus package, those loans have been interest free—until now. States are now facing an estimated $1.4 billion in interest payments over the next year, and that doesn’t even touch the principal.
Valerie Kroeger, assistant communications director for Indiana’s Department of Workforce Development, estimates Indiana will have to pay around $80 million in interest in its first year of repayment.
“That translates into about $56 a year in additional taxes per employee, per employer,” said Kroeger.
The additional interest payments mean higher expenses for states and almost certainly higher taxes on employers like those in Indiana—a double whammy during an economic downturn.
Arizona, which owes a relatively modest $184 million to the federal government, increased employer taxes in early 2010 to help rein in borrowing. But tax increases during tough economic times can be a difficult pill to swallow.
“The dilemma we face is, how do you do that without hurting the economic recovery we all hope is coming?” Steve Meissner, communications director for the Arizona Department of Economic Security, told The Wall Street Journal. “No one wants to do anything that would impose a new tax burden on businesses that are trying to come back in a tough economic time.”
According to a survey by the National Association of State Workforce Agencies, 35 states increased tax rates on employers in the 2010 fiscal year, and seven states enacted legislation to raise the taxable wage base, the amount of wages employers pay taxes on.
California has borrowed the most of any state—nearly $9 billion so far. The state’s Legislative Analyst Office recently published a report, “California’s Other Budget Deficit,” which analyzes various scenarios to make the unemployment fund solvent again. The report urges the legislature to take prompt action to bring tax revenues and benefit payments in line.
Todd Bland, director of social services for the Legislative Analyst Office and editor of the report, said that will likely involve some combination of tax increases on employers and benefit reductions for unemployed workers.
“In the long run, the legislature has more options, such as making gradual changes to create surpluses which pay off the accumulated federal debt. Also, for the long term, the legislature could look at approaches that are outside the (unemployment insurance) system, such as creating new temporary sources of revenue to pay down the debt over time,” said Bland.
Finding a viable solution to regain solvency comes with high stakes—the California Employment Development Office estimates the state could be smacked with a $362 million interest payment by September 2011, with growing obligations in the years to come.
Texas has taken a different approach to paying back its interest obligations. In November, the state sold $1.2 billion in bonds that it will use to pay down the state’s $1.58 billion loan before an interest payment is due. The interest rate on the bond is a little more than half the rate it would be paying the federal government, which is around 3.9 percent.
According to Ann Hatchitt, director of communications for the Texas Workforce Commission, bond sales allow Texas to have more control over the interest rate and the payback period for any debt necessary to replenish the Trust Fund and may limit the need for tax increases.
“By issuing bonds over a seven-year period, we can minimize the impact of rising tax rates for Texas employers,” said Hatchitt.
As more states accrue debt and in higher amounts over the next year, other states may consider issuing bonds as a way to financially supplement their unemployment trust funds. But all states with shaky unemployment funds will be faced with a difficult task—weighing the benefits of keeping tax rates low for businesses and benefits stable for the unemployed with the need to regain short-and long-term solvency.