North Carolina's high unemployment rate has stuck the state with $1.4 billion in debt - money that officials don't know how they'll pay back.
It gets worse. The debt is still rising.
The problem is that with about one-half million people out of work, the state has more unemployment claims than it can pay. So it has been borrowing from the federal government since February, sometimes as much as $20 million a day.
The tally will rise to at least $2 billion by the end of the year, said David Clegg, deputy chairman and chief operating officer of the N.C. Employment Security Commission. Next year, depending on the economy, could add another $2 billion to the tab, he said.
For purposes of comparison, the state budget for the current fiscal year is $19 billion.
"It's way beyond precedent," Clegg said. During the last recession, the state borrowed a piddling-by-comparison $270 million for its unemployment insurance trust fund.
This time, only five states have borrowed more than North Carolina. Altogether, seven states have borrowed more than $1 billion each - more than $15 billion collectively - to shore up their unemployment insurance systems, according to the U.S. Department of Labor. A total of 24 states plus the Virgin Islands have borrowed money from the federal government.
Many states "are in pretty dire straits right now," said Ingrid Evans, unemployment insurance director at the National Association of State Workforce Agencies.
Among other factors, the states' debts are a function of the unemployment rate, which is 11 percent in North Carolina; their size, because a state that has the same jobless rate as its neighbor but a larger population will have more unemployed; the amount of weekly benefits; and the tax rate that employers pay to fund the benefits.
Because of the federal stimulus package, the debt is interest-free through the end of next year. But the way things stand right now, the state will have to start paying it back with interest beginning in 2011.
Fortunately, emergency extensions of unemployment benefits that Congress has approved are completely funded by the federal government. The state is borrowing only to cover the first 26 weeks of benefits.
The best hope for North Carolina, Clegg said, is for Congress to forgive a portion, if not all, of the debt.
Another solution would be to raise the tax on employers that funds jobless benefits. Indiana, which owes about as much as North Carolina, recently took that move, but North Carolina officials worry it would increase financial pressure on businesses when they can least afford it.
"I would love to hear some U.S. Department of Labor official explain how they expect the states to pay billions of dollars from an employee base which is, at best, 20 percent smaller than it was before the recession started," Clegg said.
No plan for paying debt
Michael Walden, an economist at N.C. State University, expects the federal government to come under pressure to forgive at least some of the billions that the states owe.
"The good news is, all the states are in the same bind," he said.
The National Association of State Workforce Agencies, which represents state departments such as the ESC, has made sure that members of Congress on both sides of the aisle are aware of the states' plight, Evans said. But with the states not due to make any debt payments for more than a year, no proposals for dealing with the issue have surfaced. Indeed, the association itself hasn't yet formulated its position.
Right now North Carolina doesn't have a definite plan for paying off the debt. What's most important today, state officials say, is that the state is continuing to pay unemployment benefits.
The only source of money for the unemployment insurance fund now - other than loans from the federal government - is the unemployment insurance tax that employers pay. Companies typically pay the tax quarterly, and the rate depends on how many workers the companies have laid off and how much those workers received in unemployment benefits.
The tax is capped at 5.7 percent of taxable payroll; the average rate currently paid by companies is 1.6 percent.
In the 12-month span that ended in October, the state collected $960.8 million from employers.
"There was a time that would have impressed me," Clegg said. Now, of course, the state is borrowing more than it is taking in.
'We've got options'
Increasing the tax rate on employers would be up to the General Assembly. But it would take a sizable increase to make a difference, and any attempt to do so likely would be resisted by the business sector.
"Clearly, in this environment, any action taken to raise the cost of doing business is a concern to us," said N.C. Chamber spokeswoman Sherry Melton. "But we believe state lawmakers have this same concern."
Senate President Pro Tem Marc Basnight said he is studying the issue and expects to make recommendations in January.
But he added, "it could be devastating to our economy" if the federal government doesn't help North Carolina out with the debt.
Basnight said increasing employers' tax burden could have the perverse effect of increasing unemployment by putting some companies out of business. If the state chose to dip into the general fund, which currently doesn't contribute a cent to the unemployment insurance fund, that would cut into appropriations for education, health care and other vital programs, he added.
Gov. Bev Perdue isn't sounding alarms, according to spokeswoman Chrissy Pearson. The state has paid back money it borrowed for unemployment insurance claims in the past, and the governor "feels confident we will once again find a way to pay the federal government back as the state's economy rebounds," Pearson said.
"We've got options," she added. "There may be the option that the feds will forgive some of that debt. ... As the governor put it, we'll play the hand we're dealt."
Walden, the economist, said raising taxes would be a mistake as long as the economy is hurting.
"In essence, you can look at that as a tax on new employees, and we don't want to do that," he said.
The deep recession has made it impossible for North Carolina to forecast how much unemployment tax funds the state will receive from employers next year, Clegg said.
"Not to be maudlin, but I don't know who will be paying taxes in the first quarter of 2010 because I don't know what businesses will survive," he said.
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