Unemployment Bill Comes Due
By Jennifer Burnett, CSG Senior Research Analyst
As state leaders come together to hammer out their 2012 fiscal year budgets, many will find a new bill to pay—and it isn’t small. Thirty-one states have borrowed more than $42.5 billion from the federal government to continue paying unemployment benefits, and interest on those loans comes due this fall.
In Delaware, that means the state’s employers will find a new bill in the mail this year. The state has borrowed under $41 million so far—less than 1 percent of what larger states like California have borrowed— but Tom MacPherson, director of the unemployment insurance division at the state Department of Labor, estimates that number will eventually grow to around $76 million. When the state’s unemployment trust fund became insolvent, it triggered an automatic “temporary emergency employer assessment,” which means the state’s employers will be billed up to $11.50 per employee this year.
“Although this provision has been a part of Delaware unemployment law for over 20 years, this is the first time that we have actually had to use it,” said MacPherson.
While the national unemployment rate continues to hover around 9.4 percent—with state rates ranging from 3.8 percent in North Dakota to 14.5 percent in Nevada—states are struggling to pay unemployment benefits. Until now, a provision in the American Recovery and Reinvestment Act delayed interest from accruing on those loans from the federal government. Now, that provision has expired and interest payments will be due this fall at a rate of nearly 4.1 percent.
According to MacPherson, that equals an interest payment that is a little more than $3.1 million for his state, which would come due Sept. 30. In 2008, Delaware increased the taxable wage base for the first time in 20 years—from $8,500 to $10,500—but it is likely no new changes are on the horizon.
A similar story is playing out all over the country. In August, Connecticut will begin charging businesses a special assessment equal to about $40 million—or around $40 per employee. Carl Guzzardi, tax director for the state Department of Labor told the Hartford Business Journal the state could eventually borrow more than $1 billion to keep its unemployment program afloat, bringing total interest costs to a projected $100 million.
In Arizona, a bill to charge employers a special assessment of $70 per employee over two years is making its way through the legislature. The state faces an unemployment rate of 9.4 percent and has borrowed more than $276 million from the federal government.
Florida has borrowed more than $2 billion so far and continues to borrow more each month. According to the Sunshine State News, Florida’s unemployment taxes have nearly tripled this year and the minimum tax employers pay will more than double again in 2012. The state will have to pay out up to $61 million in interest charges in September.
Gov. Earl Ray Tomblin of West Virginia—one of the few states that have not yet had to borrow money—has proposed the state use rainy day funds to replenish the state’s unemployment account so that it won’t face a big interest bill later.
Texas has also taken a pre-emptive approach: The state has sold $2 billion in bonds that it will use to pay down the state’s debt before an interest payment is due. The interest rate on the bond is about half the rate it would be paying the federal government.
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 states struggle to balance their budgets in one of the most challenging fiscal situations in memory, paying interest to the federal government is a difficult pill to swallow. During The Council of State Governments’ 2010 National Conference in Providence, R.I., the Executive Committee passed a resolution in support of extending interest relief on unemployment loans. The resolution urges Congress to delay interest accrual on state loans from the Federal Unemployment Account until states have recovered from the impact of the recent recession.
“Paying a 4 percent interest rate on these loans would put a strain on our budgets we just can’t handle right now. We’re not asking for a handout here; we’re just asking for a chance to begin recovering before adding another big stress on our budgets,” Idaho Rep. Maxine Bell, the resolution’s sponsor, said.
In addition to CSG’s resolution, governors from 14 states recently wrote a letter to Congress, also urging the federal government to extend the interest moratorium for another two years. “Extending the interest-free loans would allow states to avoid increasing payroll taxes, reducing benefits, or both, while the economic recovery continues,” the letter said.
As state leaders come together to prepare for a new fiscal year, it is uncertain whether Congress will take action to extend the interest moratorium or offer states other relief. It is certain, however, that states are facing a long road ahead to recovery.