Pa. borrowing to fund unemployment system
Pennsylvania has begun borrowing money from the federal government to uphold its unemployment system as hundreds of thousands of people are still out of work due to the novel coronavirus pandemic.
The loans, which more than a dozen other states also have begun to use, will not affect workers’ unemployment checks but could lead to higher taxes for employers in the region, cuts to spending in other areas of the budget and years of debt to the federal government.
Pennsylvania just finished repaying billions of dollars of debt acquired from the last time it borrowed money for the unemployment system — during the economic downturn that followed the 2007-09 Great Recession — in January.
“Over a decade of economic growth was largely spent generating unemployment insurance taxes to pay off the effects of the crisis,” said Jared Walczak, vice president of state projects at the Tax Foundation think tank in Washington, D.C.
“Pennsylvania is again on track to be one of the states that borrows the most extensively and incurs the most debt in this process,” he said. “Pennsylvania will spend years paying off the debt that they accumulate now.”
In April, Mr. Walczak estimated a handful of states would be able to cover fewer than 10 weeks of unemployment benefits before running out of money. Pennsylvania, he predicted, could afford 11.
Since mid-March, when Gov. Tom Wolf first ordered business closures and mandated stay-at-home orders, the state has paid out more than $32 billion in unemployment
benefits and surpassed Mr. Walczak’s estimate by about nine weeks.
Now, Pennsylvania is one of the first states leaning on the federal government for help amid record levels of unemployment nationwide.
As of Aug. 3, 10 states and the Virgin Islands had an outstanding balance for a loan. Another eight, including Pennsylvania, were lined up to borrow money this month.
Solvency and loans
Pennsylvania’s unemployment system is funded through employer and employee taxes. Generally, it provides temporary benefits to workers who became unemployed through no fault of their own. Amid the COVID-19 pandemic, federal and state governments relaxed some qualifications for eligibility, like the requirement that individuals are actively seeking new work.
Pennsylvania began the borrowing process in July, according to Jerry Oleksiak, secretary of the Department of Labor and Industry.
Rather than thinking of it as a loan, he said, it is more like a line of credit. Pennsylvania is borrowing $800 million for August, $1 billion for September and $1 billion for October.
In an effort to provide relief to states during the novel coronavirus pandemic, Congress has temporarily waived interest on loans for unemployment compensation benefits this year.
Under normal circumstances, a state is eligible for interest-free loans only if its unemployment trust fund is, in simple terms, in good shape. States generally should have enough money available to weather an average economic recession, according to Michele Evermore, a senior policy analyst at the left-leaning research group National Employment Law Project.
Determining that exact amount is a complicated formula that involves finding the average of some of the highest years of payouts from the past 20 years, Ms. Evermore said.
Based on a February report from the U.S. Department of Labor, Pennsylvania was not prepared. It was one of 21 states, along with the Virgin Islands, that fell below the recommended minimum adequate solvency level.
Based on a complicated set of factors, the federal government recommends states have a solvency level of 2.5. Pennsylvania had a level of 0.65.
If not for the pandemic, Pennsylvania’s trust fund would have been solvent by late spring or early summer, Mr. Oleksiak said at a news briefing in July. “We were well on our way to doing that, ahead of schedule in doing that,” he said.
Pennsylvania’s future?
Although the loans could have lasting impact in Pennsylvania, borrowing money will not impact workers’ unemployment checks right now.
The federal system is set up to make sure “those who are laid off receive the benefits to which they are entitled — even if their state did not plan appropriately for the crisis,” Mr. Walczak said.
In the past, though, some states did adjust benefits in order to pay off outstanding debt, according to Ms. Evermore.
In North Carolina, for example, after the Great Recession, officials lowered the number of weeks eligible recipients could receive benefits to 12, down from the typical 26 weeks. States also could cut the number of people eligible for benefits or make it more difficult for users to get into the system, Ms. Evermore said.
But that can’t happen right away. Congress has put a nonreduction clause in place that prohibits states from changing how they determine unemployment benefits — part of the federal government’s efforts to provide economic relief amid COVID-19.
Ms. Evermore said she expects most states will have to borrow money from the federal government at some point to weather the crisis.
For employers, Pennsylvania’s loans could mean higher taxes, as it did when the state borrowed money for unemployment after the Great Recession.
In January, after fully repaying that debt, Mr. Wolf eliminated the 1.1% unemployment compensation tax rate interest factor, or the additional tax placed on employers to repay interest from federal loans or bond obligations. That rate had been put in place in 2013.
Now, it is likely Pennsylvania will have to make a similar move to repay the debt from this new round of borrowing, said Alex Halper, director of government affairs for the Pennsylvania Chamber of Business and Industry.
“This will certainly add additional cost on top of what is already pretty significant financial responsibility for all Pennsylvania businesses,” he said, adding that many businesses were already struggling with higher costs to comply with new health and safety mandates amid the pandemic.
The Pennsylvania Department of Labor and Industry did not respond to questions about the possibility of changing benefits or raising taxes.
Robert Strauss, a professor of economics and public policy at Carnegie Mellon University, predicts COVID19 will continue to disrupt business and economic activity, possibly through 2021. That means future lawmakers are going to face some uncomfortable decisions about raising taxes and cutting spending, he said.
It is “morally compelling” to continue to take on debt in order to pay unemployment benefits, he said. “But it’s going to come at the expense of potentially other things that we’re used to doing, like fixing the roads.
“If we’re in for a period of severe austerity, then what’s on the table for discussion?” he asked, referencing things like spending for higher education institutes and public schools. “It’s not going to be a one-time, one-year fix.”
For Ms. Evermore, it’s not yet time for discussions about raising taxes or divvying up funding to pay off potential debt. Instead, it’s time to focus on the workers.
“I think that during a recession, a state should be focused on paying benefits and paying benefits and paying benefits,” she said. “Not worrying about the trust fund. The trust fund concern is a concern for a happier day.”