The Hidden Cost of High Unemployment
▶ States pay billions in interest on loans to cover jobless claims ▶ “This is money that we should not be paying out”
Amid the economic collapse of 2008 and 2009, the spike in people claiming unemployment benefits forced 35 states to borrow from the federal government to cover payouts from their state jobless funds. States have borrowed $134.5 billion to pay unemployment claims since the end of 2007, when the last recession began, according to the U.S. Department of Labor. That’s generated $3.7 billion in interest for Uncle Sam since 2011, when a provision in the 2009 stimulus law suspending interest payments expired.
While most states have found ways to retire the debt, three still haven’t: California, Connecticut, and Ohio. California’s debt is the highest, at $6 billion. Under federal law, employers are on the hook to pay back the principal through higher unemployment
taxes. In many states, including Connecticut, employers are also expected to cover the accrued interest.
California has so far covered $1.3 billion in interest payments out of its general fund. Employers in the state have sent Washington more than $1.8 billion. Without benefit cuts, they’ll be responsible for covering the rest of the payments, which are projected to keep paying at least through 2018. “It’s a burden,” says Marti Fisher of California’s Chamber of Commerce.
Ohio’s outstanding balance is $775 million. Employers have paid $962 million in additional taxes, and the state covered $246 million in interest, according to the Ohio Department of Job and Family Services. “This is money that we should not be paying out,” says Ginny Grome of Restaurant Management in Cincinnati, which owns 65 Arby’s restaurants in seven states. The company has paid almost $218,000 in extra taxes because of Ohio’s outstanding loan. “That’s a lot of money as far as reinvesting” or hiring more staff, she says.
In Connecticut, employers have paid $504 million in extra taxes and $85 million in interest, an overall rate more than four times higher than in neighboring Massachusetts, which took out $1.5 billion in federal loans but paid it back before any interest was charged. Connecticut expects to pay off its $101 million balance next year, says Carl Guzzardi of the state’s Department of Labor.
Colorado, Illinois, Michigan, and five other states issued bonds or borrowed from other funds to retire their federal debt. Others raised employer taxes and reduced benefits. In November, Indiana advanced funds to retire its $250 million debt and save businesses $327 million next year. “Hoosier businesses and employees can now rest assured that this tax on hiring has been eliminated,” Governor Mike Pence, a Republican, said in a Nov. 10 release.
Only 17 states have sufficient cushions built into their unemployment insurance funds to get through another downturn without borrowing from the federal government again, according to the Labor Department. Lawmakers in Ohio are taking steps to prevent a shortfall, introducing legislation that would raise taxes on employers until an adequate reserve is met. The bill would also reduce unemployment benefits and require drug testing to determine eligibility in some cases.
The Ohio AFL-CIO opposes the measure because it “unfairly puts the burden of reform on the backs of the unemployed while employers will pay less overall,” President Tim Burga said in a statement. State Representative Barbara Sears, a Republican who sponsored the bill, says the time to bolster the fund is now, while unemployment is falling and the economy is improving. “Do we want to go into the next recession prepared to the best of our ability?” she asked at a Nov. 10 hearing in Columbus. “Or do we want to go into the next recession ill-prepared and take the full brunt of the hit long after the recession is over?” �Mark Niquette
billion California’s debt to the federal government for loans to cover unemployment
benefits The bottom line States have paid the federal government $3.7 billion in interest for loans to cover unemployment benefits since 2011.