President Proposes Respite to Debt-Burdened States

When President Obama's 2012 budget is unveiled next week, it will include a surprise gift to states indebted to the federal government for unemployment insurance trust fund loans. Administration officials are reporting that the president's proposal will include a plan to give states a two year respite from automatic tax increases and interest payments on unemployment insurance loans. 

“We are giving help to some states who have had to borrow and not been able yet to pay back," said Robert Gibbs, the White House press secretary.

For many states hit hard by high unemployment, this plan would provide significant relief as policymakers begin developing their fiscal year 2012 budgets. 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.

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.

In many states, taxes have already been raised on employers due to legislation that automatically triggers increases when the unemployment fund becomes or is about to become insolvent.

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.

According to MacPherson, if interest payments are not delayed, the state will owe a payment that is a little more than $3.1 million, which would come due Sept. 30.

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.

The president’s proposal would help alleviate some of the tremendous fiscal pressures states are facing – but not forever.  The proposal would not eliminate the debt states have accrued, only temporarily suspend interest payments.  In addition, in 2014, the minimum taxable wage base (the amount of income employers pay state unemployment taxes on) would increase from $7,000 to $15,000.  It has been decades since the minimum wage base has been adjusted upward.

Employers pay unemployment taxes to both the state and the federal government – under this plan the rate for the federal portion of taxes would be lowered at the same time so that states without debt burdens would not see their federal taxes increase. However, it is important to note that some states have already increased their taxable wage bases to help get their debt under control – like Delaware who, in 2008, increased its base for the first time in 20 years, from $8,500 to $10,500.

Congress will still have to approve the president’s proposal – which some say will face serious opposition – but this announcement offers hope to those states with big debts and limited resources.  

Data Retrieved from the U.S. Department of Labor, Employment and Training Administration