The $2.4 billion that the state owes the federal government – money it borrowed to pay jobless benefits – could become the catalyst for an overhaul of the state’s unemployment insurance system that spreads the pain of erasing that debt.
However, state legislators say their upcoming proposal to deal with the unprecedented debt won’t eliminate the issue that has outraged the business community – the higher taxes being imposed on employers to pay down the debt.
At the other end of the spectrum, to the consternation of advocacy groups for the poor, legislators are looking at reducing benefits for future unemployed workers so the state doesn’t rack up additional debt.
“It’s not going to be fluffy and kind, and I know I am going to get my butt kicked from all sides,” said Rep. Julia Howard, a senior Republican lawmaker from Mocksville and co-chair of the Joint Revenue Laws Study Committee that has been scrutinizing the issue. “There will be pain all around on everybody’s part. It has to be like that because we are all in this together.”
“Our goal,” said co-chair Robert Rucho, a Republican senator from Mecklenburg County, “is to put our financial house back in order.”
The committee plans to unveil its recommendations in early December, a major step toward assembling a bill that the legislature could take up in January.
Meanwhile, Gov.-elect Pat McCrory “wants to look at all options and figure out the best way forward for the state and the businesses,” said McCrory spokesman Ricky Diaz.
Beginning in February 2009, the state’s high unemployment rate forced it to begin borrowing money from the federal government to pay for the first 26 weeks of unemployment benefits; any benefits unemployed workers receive after 26 weeks are funded solely by the federal government.
The state’s debt totaled $2,427,629,242.27 as of Nov. 15. Of the 20 states that still owe money to the federal government for unemployment payments, North Carolina’s debt is greater than all but two much larger states: California and New York.
This year the federal government required N.C. employers to pay higher federal unemployment taxes – commonly designated as FUTA for Federal Unemployment Tax Act – to help pay off the debt. Going forward, FUTA taxes for the state’s employers will continue to rise, at a rate of $21 per worker each year, for as long as the state is in debt to the federal government. (Employees don’t pay unemployment taxes; employers pay both state and federal unemployment taxes.)
The state already has made two interest payments to the federal government: $83.9 million on Sept. 30 and $78.5 million 12 months earlier, according to the N.C. Division of Employment Security. That money came from state unemployment taxes paid by employers.
The state continues to borrow money to meet its unemployment obligations – about $23 million a week.
The prospect of serial FUTA increases has galvanized the N.C. Chamber, a powerful business lobby.
“It is a hindrance on jobs,” said chamber lobbyist Gary Salamido. “It’s adding to the cost of the jobs.”
Advocacy groups, however, contend that the problem was caused by a series of cuts in the state unemployment taxes paid by employers implemented by the state in the 1990s, which benefitted employers for years.
The chamber is pushing legislators for a “comprehensive” solution to the problem, and Howard and Rucho discussed broad outlines of a proposal that includes some of the chamber’s “reforms.”
The most controversial of the chamber’s recommendations is to reduce the amount and length of benefits.
It wants to cut the maximum weekly benefit from $506 to $350 and lower the maximum length of benefits paid by the state from 26 weeks to 20 weeks. The chamber also recommended that those currently unemployed be shielded from any cuts implemented.
The chamber contends that the cuts would bring North Carolina’s benefits more in line with other states. But the N.C. Justice Center, an advocacy group, counters that the average weekly benefit of $294 puts the state right in the middle of the 50 states.
It argues that reducing benefits for the unemployed would hurt both those who have lost a job through no fault of their own and the state’s economy.
“Those folks aren’t going to be able pay their utility bills. They aren’t going to be able to pay their rent, their mortgages. They aren’t going to be spending as much at the grocery store,” said Alexandra Forter Sirota, project director for the Justice Center. “There will be ripple effects throughout the economy.”
J.P. Sakey, CEO of Headway Workforce Solutions, a company in Raleigh that provides outsourcing services to clients such as Hickory Farms, is dismayed that the state’s elected officials haven’t acted sooner.
“There appears to be a paucity of leadership in this area,” he said.
Sakey said the higher FUTA taxes cut directly into profit and make it tougher to give employees raises. He also said that the next time a client hires his company to operate a call center, the higher FUTA taxes combined with the state’s unemployment tax rate could factor into selecting a location.
“We might recommend it go somewhere else,” Sakey said.
The state unemployment tax paid by employers ranges from zero to 6.84 percent of an employee’s wages up to $20,400, with the rate dependent on the employer’s history of layoffs.
Bond issue called too costly
The N.C. Chamber also has urged the state to erase its debt to the federal government – and thereby eliminate the extra tax the federal government is assessing – by issuing bonds. Those bonds would be paid off by unemployment taxes collected from the state’s employers.
But Howard and Rucho said the state can’t afford the additional debt. In addition, Howard said that after consulting with state Treasurer Janet Cowell and bond counsel, they concluded that a bond issue would require an even greater tax hike for employers at the outset than the $21-per-employee-per-year increase they are facing.
“This way, as egregious as it is, it’s a more gentle slope,” Howard said.
The legislative committee is also considering a recommendation to require employers who currently don’t have to pay any state unemployment tax – because they don’t have a history of layoffs – to contribute to the system.
That’s something the N.C. Justice Center wants to see. The organization issued a report in May lamenting that 19,000 employers now pay no state unemployment tax.
“The majority of states require some contribution from all employers in a downturn,” the center’s report noted.