Could New Debt Bail Out Old Debt For Arkansas?

Arkansas business, labor and government leaders are struggling for a solution to a growing $330 million state debt owed to the federal government for borrowed funds to shore up unemployment benefits to jobless workers.

The debt has accumulated in a fund – which is supported by business owners through state unemployment tax assistance (SUTA) contributions – that pays for unemployment benefits to laid off workers. At one time, the balance of the fund used to stay around $200 million, but in recent years has declined. Certainly as Arkansas’ unemployment rate has climbed and the number of layoffs has risen, claims from the fund have jumped sharply.
 
Labor interests want to maintain current benefit levels and oppose changes to worker eligibility. A recent Congressional extension of benefits has strengthened their hand to protect a number of provisions the state can’t rescind.
 
Business leaders have floated an incremental increase in the business taxes that replenish the state’s unemployment insurance fund, but Arkansas lawmakers object to any tax hikes on businesses in the current economic climate. Their opposition has stalled that initiative.
 
If the issue ends in a stalemate, the federal government will impose a charge on businesses that is likely to be more draconian than any state solution might be.
 
So what is an Arkansas lawmaker to do?
 
Caving to labor may signal weakness among business supporters. Adopting the pro-business solution of an incremental tax hike would be politically unpopular back home. Letting the feds solve the problem for the state would make for a good boogeyman, but in the end, the final blame would be pinned on the lack of a state solution.
 
There is always hope the feds might forgive the debt. But with the balance owed from at least 33 states to the federal government swelling to nearly $40 billion, forgiveness is unlikely.
 
Despite the tricky tight-wire act, lawmakers say they want to do something although it is unclear if any single legislator is taking charge of the issue.
 
State Senator Johnny Key, R-Mountain Home, has introduced a bill, SB 87, to tighten requirements for receiving unemployment benefits, especially for those fired for misconduct or criminal activity.
 
Rep. Denny Altes, R-Fort Smith, has proposed legislation, HB 1057, which would take an additional half-percent of wages from workers – not employers – to shore up the fund.  Altes has two other bills that would require greater scrutiny of those filing for unemployment.
 
Sen. Larry Teague, D-Nashville, head of the Senate Revenue and Tax Committee, is a vocal advocate of addressing the issue, but he doesn’t see a resolution coming together.
 
"I don’t know where we’re going. I don’t know if we’ll deal with it at all in this session," Teague said, noting that Arkansas owes $518,000 in interest to date and its accruing daily.
 
"There’s some discussions in the back rooms about what to do about it," Teague said, "but I just don’t know."
 
Freshman Sen. Jason Rapert, R-Bigelow, is a financial planner and has expressed interest in a potential bond issue to pay off the multi-million dollar debt.
 
But could new debt be the solution to pay off old debt?
 
Rapert and other legislators are eyeing how Texas dealt with a similar issue in 2003 – a situation that it, like Arkansas, is facing again.
 
Texas nearly tripled the levy charged to businesses on the fund when it implemented a successful four-year bond issue in 2003 to pay its unemployment insurance trust fund debt. It is looking at doing that again now that the jobless fund is in the red.
 
In short, Texas was able to achieve a lower interest rate on the bonds, around 2%, than the interest rate being charged by the federal government, about 4%. With the differential, the financial deal made sense.
 
For Arkansas, that could be a long-shot solution, and for now, lawmakers are open to the idea. The biggest challenge is in finding the revenue stream to pay for the bonds.
 
"I’m not going to be voting for a tax increase, I can tell you that," said Rapert, who was elected in the GOP tidal wave of 2010. "We’re looking at, ‘are there any existing revenue streams that could be dedicated to this situation?’"
 
No one can answer that question today, but bond lawyers, legislative researchers and others are scouring state statutes to explore.
 
Another potential tripping point: timing. Bond markets can fluctuate and conditions could change dramatically enough to undo the deal if too much time lapses between legislators agreeing to it, getting voter approval (if necessary), and getting the bonds issued.
 
In addition to that, lawmakers contend more gubernatorial leadership in the wake of a lack of consensus could help.
 
"If the Governor would provide leadership, then that would make a difference," Teague suggested.
 
Beebe has told business and labor groups to work toward a compromise. He said in a recent Talk Business interview that he thought the incentive of federal intervention would motivate all sides to find common ground.
 
"I prefer for us to solve our own problems," Beebe said. "But ultimately, if we can’t get management and labor together on something that’s agreeable to get done, and with the kind of fractured nature of what you can expect from this legislature, the feds will take care of it for us.”

More from state lawmakers in this video below.