Mike Klein Online

Georgia Unemployment Migraine: “Right Now We’re In The Trauma Room”

Mike Klein

Georgia has an unemployment migraine.  Evidence of that is almost everywhere you look.

The percentage of jobless Georgians – now 10.2% — has been higher than the national average for 39 consecutive months.  Georgia recently posted the nation’s worst weekly increase in initial unemployment claims.  And, the state expects to owe $820 million to Washington because it has borrowed federal funds to help write unemployment checks since December 2009.

“Right now we’re in the trauma room,” said Mark Butler, the former state legislator who was elected last November to become Georgia’s first new labor commissioner in twelve years.  Butler presides over a $416 million budget of mostly federal dollars and 4,000 employees.

These numbers matter most to Butler:  388,000 out-of-work Georgians received unemployment checks last year.  Fifty-four percent are long-term unemployed, which means they had no work for at least 27 weeks.  The U.S. Department of Labor reported last week that Georgians filed 10,335 initial unemployment insurance claims during the week that ended January 22, the most new claims in any state.

State labor officials do not have data on the number of Georgians who exhausted all state and federal unemployment benefits after 99 weeks.  But labor officials estimate some 300,000 jobs were lost during the recession.  That placed an enormous burden on benefit payments.

The state unemployment insurance trust fund is worse than broke.  Once flush with nearly $2 billion, it was depleted because the state made decisions to reduce contribution taxes paid by employers.  Then two recessions within 10 years took their toll, especially the 2008 economic collapse.

“We had a plan, an insurance level.  The (2008 recession) was much worse than insurance could protect against,” said state economist Kenneth Heaghney of Georgia State University.

Unemployment compensation trust funds are a federal-state partnership created by the Social Security Act of 1935.  Washington has oversight but states design their programs within federal requirements.  States that exhaust trust fund reserves can borrow without limit from the Federal Unemployment Account.

Trust fund accounts are forward-funded.  Employers pay taxes based on formulas that include employee total earnings and the company’s layoff history.  The theory is funds that accumulate during good times will be used to write checks during bad times.

Georgia employer contributions have not kept pace with benefit claims.  The state received $620 million in employer taxes last year but checks totaled $1.165 billion. Still, that was better than the 2009 calendar year when checks reached $1.725 billion.  Trust fund reserves were used to bridge the gap until they ran out 14 months ago.

How big a deal is this nationally?  The U.S. Department of Labor’s new update last Friday said 30 states and the Virgin Islands have outstanding loan balances that total $42.3 billion. Georgia borrowed $588 million through January 21.  That became $620 million through last week, then $634 million through Monday.  Butler predicted the level could reach $820 million this spring.

How did we get here?  In part, the answer is purely mathematics – Too many people have been out of work too long and there is not enough money going into the fund – but policy decisions made in Georgia dating back to the early 1990’s also played a significant role in the fund going broke.

Forty years ago – before a stunning population explosion – Georgia’s unemployment trust fund had less than $500 million.  It grew rapidly over 20 years in step with population and business community growth.  By the early 1990’s the fund was at $1 billion and buoyed by the robust economy, there was political sentiment to cut unemployment taxes paid by businesses.

The state made a $45 million cut in 1994.  Massive reductions happened during the Governor Roy Barnes administration: $92.2 million in 1999, another $30.6 million in 2000 and a decision by Barnes to reduce corporate trust fund taxes by $1 billion more over four years.

Contributions went onto a state tax holiday at almost the precise moment that the first of two recessions arrived.  The fund held $1.93 billion in December 1999 but four years later just $701,900 remained.  The tax holiday ended at the start of 2004, but that same year the state announced another $50 million cut.

An economic analysis by the Georgia State University Fiscal Research Center in March 2006 said Georgia’s fund had never approached insolvency during 35 previous years, but FRC also concluded the fund would have “a tough time financing future payouts especially if the state suffered a fairly quick downturn in 2006 or 2007.”

The Fiscal Research Center cast its scrutiny elsewhere in this warning, “Experts draw a close comparison with New York, Texas, Illinois and other states whose UI Trust Funds are now insolvent following UI tax cuts during the celebrated economic times of the 1990’s.”

Georgia would soon learn that painful lesson.  The $1.28 billion trust fund balance in December 2007 was completely gone less than two years later.  Federal Unemployment Account loan funds are drawn down as needed and Georgia borrowing that began in December 2009 averaged $42 million per month through January of this year.

Where would the fund be today without that $1 billion tax holiday?  “We would probably be in better shape than any state in America,” Butler said.  “Everyone would be saying, we wish we were Georgia.  We would have a little more than $500 million sitting in the trust fund right now.”

Here is what the next few months look like.  Georgia expects to collect more than last year’s $620 million in employer contribution taxes.  Most receipts will be posted after the first quarter because the tax is levied on the first $8,500 of a worker’s income.  Butler said that should enable the state to stop borrowing money from Washington.

Then there is the $18 million question, which is the estimated size of Georgia’s first interest payment owed to the federal government before the end of September.  Federal law prohibits the state from using employer contribution funds to cover the interest.  Translation: The state must find $18 million inside the general fund or other monies at the Department of Labor.

“The best I can tell, there wasn’t a whole lot of emphasis on planning to take care of this,” Butler said.  “I hate to be critical, but I think there were some assumptions made that the state would come up with the money.”  Butler is looking first at department accounts to find some dollars.

The Wall Street Journal reported Wednesday that the White House will propose waiving those interest payments for two years.  The Journal also said the federal government would propose to more than double the amount of employee wages that are subject to unemployment taxes.

Then there is the $634-to-$820 million question.  Washington has not established a repayment deadline but the federal loan rate increases each year principal goes unpaid.  Butler has asked for a legal opinion about whether the state can issue bonds to retire the debt.  The state pays about 4% on federal loans and Butler said state bonds could be sold for perhaps half that rate.

“We would save millions of dollars in interest,” Butler said.  “We have to be very careful about paying this back.  If we’re irresponsible, if we don’t make the payments as soon as possible, our businesses are on the hook for this money and the rates will increase dramatically on the federal side.”  Butler said benefit reductions are not an option; “That’s off the table.”

Georgia must also decide how much reserve to maintain when the trust fund is solvent.  Today’s economy is more volatile than forty or twenty years ago.  The choices will include whether to raise rates paid by employers so the fund can withstand any downturn or choose solvency for most needs with a choice to borrow federal funds again during an economic collapse.

Butler said he would like to convene “a fairly large tent from the private sector” to think about a system that “needs some basic tweaks.”  He added, “This is not something that we want to tackle right now but it is something we do want to take a look at (to create) the most fair, most sound system with the least amount of burden on Georgia businesses.”

Georgia Data:

Georgia Unemployment Rate:  10.2%

National Unemployment Rate:  9.0%

December 2009 Long-Term Unemployed:  168,200

December 2010 Long-Term Unemployed:  252,200

November 2010 Statewide Payroll Jobs:  3,849,000

December 2010 Statewide Payroll Jobs:  3,827,000

December 2009 Initial Claims:  100,896

December 2010 Initial Claims:  75,635

Source:  Georgia Department of Labor

Mike Klein is Editor at the Georgia Public Policy Foundation.

February 9, 2011 - Posted by mikekleinonline | Uncategorized | Federal Unemployment Account, Fiscal Research Center, Georgia Department of Labor, Georgia Public Policy Foundation, Georgia State University, Kenneth Heaghney, Mark Butler, Mike Klein, President Barack Obama, Roy Barnes, Unemployment, Unemployment Insurance Trust Fund, Wall S, Wall Street Journal, White House Budget