Our forgotten unemployment debt
Most North Carolinians are painfully aware of how grim the ongoing recession has been for our state. However, few know about our oppressive Third World debt owed to the federal government for money borrowed to pay benefits to unemployed workers.
The Tar Heel State owes a whopping $2.4 billion to Washington. In an era of multi-trillion dollar federal debt ($16 trillion and counting), North Carolina’s problem may seem small. Don’t be fooled. Our unemployment insurance debt represents 12 percent of the total state budget! Even worse, until now there was no plan to pay off the debt.
Fed’s “Offer You Can’t Refuse”
For the last several years, unemployment insurance bills piled up and politicians were happy to kick the can down the road. Of course, you cannot ignore any problem forever. To no one’s surprise, Uncle Sam came knocking and wanted his money back—and he was willing to break knees to get it. Our federal “Godfather” made us an offer we could not refuse: the debt would be extorted from North Carolina businesses with usurious charges on unemployment insurance rates.
Just how would the federal payback plan have worked? Employers normally pay $42 per employee, per year to fund the unemployment insurance system. To get their money back, the Feds required a rate increase on employers of an additional $21 per employee, per year until the debt is paid off. The huge size of our debt also triggers an additional 20 percent surcharge on employers. With sinking employment rates and the disincentives the plan places on businesses, North Carolina might never pay off its debt under this schedule.
How Did It Get This Bad?
Before going any further, it is important to understand how we got into this situation. Prior to Republicans taking control of the General Assembly in 2010, the rule for managing the state budget was to spend every dollar and borrow money in good years. In bad times, the rule was to spend every dollar, borrow everything possible and raise taxes. Virtually no money was saved and placed into rainy day funds and there was no preparation for or expectation of the Great Recession and the mass unemployment that followed. With our state’s incredible debt load, we cannot even issue bonds to pay the bill. The result is the mess we have today. The inability to repay the debt or even borrow ourselves out of the problem should surprise no one.
Republicans to the Rescue
There is no easy fix for the dilemma in which we find ourselves. However, the Republican leadership in the General Assembly has come up with a workable solution. Business groups, nonprofits and stakeholders immediately bought into the plan, understanding that some arrangement is necessary to stop the strong hand of the federal government from crushing North Carolina businesses.
The comprehensive proposal, made public last week, will make North Carolina’s unemployment system solvent by 2016, thereby removing one of the largest impediments to job creation and economic growth. The plan requires employers to pay an additional .06 percent in state unemployment taxes and expands the scope of the existing 20 percent surcharge, directing that all the money be used solely for repayment of debt and interest to date. Government employers and nonprofits that choose to reimburse benefits, rather than pay the unemployment tax, will be required to maintain a one percent reserve.
North Carolina workers are also asked to help solve the problem. The plan reduces some benefit levels, bringing them more in line with neighboring states. Under the reforms, the maximum duration of benefits will be reduced from 13-26 weeks to 13-20 weeks, with the duration of benefits tied to the unemployment rate. Additionally, weekly benefits will be based on the average of the last six months of work, rather than picking the highest three of the last twelve months, as is currently done. This should encourage more hiring by North Carolina employers.
Planning for the Future
If only someone had acted responsibly years ago, this crisis could have been avoided with a rainy day fund to draw upon. The good news is that the Republican plan also looks out for future generations by requiring a significant rainy day fund of several billion dollars. Generations of North Carolinians, yet unborn, will thank us. As Benjamin Franklin wrote in Poor Richard’s Almanac, “A stitch in time saves nine.” Too bad the Democrats who were in charge of our state for over 100 years never planned ahead.
• Thom Goolsby is a state senator, practicing attorney and law professor. He serves on the Finance and Commerce committees in the N.C. Senate.