Arkansas could owe Feds $223 million to cover jobless benefit checks

story by Michael Tilley

Arkansas has “borrowed” $119.44 million from the federal government to pay unemployment benefit claims, and could end up with a tab of more than $360 million by the end of 2011.

Officials with the Arkansas State Chamber of Commerce fear repayment of the advances from the U.S. Department of Labor will come from the more than 66,000 businesses in Arkansas — most of those small businesses.

The administration of Gov. Mike Beebe is in a wait-and-see mode with respect to how such debt might be repaid. State officials are unsure of what the federal government might decide on the more than $18.3 billion issued to 24 states that have seen their unemployment claims surpass their respective unemployment insurance funds.

THE PROBLEM
The one certain direction the problem is headed is higher; as in $998.53 million was advanced to the 24 states during the first nine days of October — with Arkansas receiving $10.07 million in that period. The Arkansas Department of Workforce Services estimates the state could owe $223.8 million at the end of 2009, and $364.4 million at the end of 2011.

Economic conditions and not doing enough to boost Arkansas unemployment compensation fund during the good times are two primary reasons the state finds itself in deep debt with the U.S. Department of Labor, noted Kenny Hall, vice president of the Arkansas chamber.

A state unemployment rate hovering for too long above 7% has created a situation in which unemployment benefits paid out by the state have jumped from $23.26 million in June 2008 to $56.99 million in August 2009. March 2009 saw the biggest hit, with more than $62.5 million paid out — or more than $15.5 million a week.

The number of unemployed in Arkansas has grown from 66,112 in January 2008 to 96,457 in August 2009.

And, according to Hall, Arkansas wasn’t “actuarially” prepared for the recession. Instead of maintaining the fund in the $100 million to $200 million range, the fund should have been closer to $300 million, Hall asserted. At the beginning of 2008, the state had $142.83 million in the unemployment compensation fund. During 2008, the state collected $267.05 million in unemployment insurance (UI) taxes and paid out $353.19 million in benefits. The balance at the beginning of 2009 was $82.48 million. Unfortunately, the state has paid out more than $439 million in unemployment benefits between January and August of 2009.

Randy Zook, president of the Arkansas chamber, is concerned that any economic recovery will not include enough job growth to help improve the state’s unemployment compensation problem. Chamber officials are concerned the unemployment compensation debt could rise to $500 million by the end of 2012.

Zook’s concerns are shared by the pro-union National Employment Law Program.

“With nearly 6 jobless workers for every job opening, economists are predicting that unemployment and long-term unemployment will remain high throughout 2010 and even 2011 — even if macro-economic growth returns and the official recession ends,” noted a NELP research paper. “Never in the history of unemployment insurance have more workers been unemployed for such prolonged periods of time.”

NELP noted in a May 2008 report that at the start of 2008, state unemployment insurance (UI) trust funds had an overall balance of $38.3 billion. In comparison, states entered the recession in 2001 with $54.05 billion in fund reserves.

“Overall, states currently have UI reserves that are roughly half the levels recommended prior to a recession,” NELP claimed in the May 2008 report.

THE SYSTEM
There are many state and federal programs to help the unemployed, yet the primary program is a federal-state system — created in 1935 — that temporarily pays a portion of wages based on how much a person earned in the 52 weeks prior to losing a job. The typical program pays the benefit for up to 26 weeks, although some states and federal programs provide a 13-week extension in areas of deep economic distress.

The U.S. Senate has approved a bill extending the normal 26-week period by 14 weeks in most states, but up to 20 weeks in states with an unemployment rate at or above 8.5%. The bill has not yet made it through the U.S. House of Representatives.

Arkansas employers pay an average of 2.4% on the first $10,000 of taxable wages per employee (The rate can vary from 0.1% to 10% based on the employment history of the business.). Also, the FUTA (federal unemployment tax act) requires all U.S. employers to pay 6.2% of the first $7,000 in taxable wages per employee, although an “offset credit” of 5.4% reduces the obligation to 0.8% — roughly $56 per employee per year — for most employers.

THE BURDEN
Zook and Hall say Arkansas business owners will likely be where state and federal officials turn to reduce unemployment compensation fund debts and to ensure the funds are more actuarially sound.

Employers already will see a UI tax hike beginning Jan. 1, 2010, when the taxable wage base is raised from $10,000 to $12,000. That increase should add about $48 million to the program, according to state estimates. The change, approved in the 2009 Arkansas General Assembly, also changes the “discharge” rules that could potentially reduce benefit payments by up to $40 million a year. Also, there is a federal extended benefit tax of 0.1% to begin Jan. 1, 2010, that is estimated to generate $12 million a year.

Yet this possible $100 million shift will not be near enough to cover existing unemployment compensation demands or the debt owed by the state to the federal Department of Labor.

“Our concern is that all of these costs are going to fall on the shoulders of these businesses that are already hard pressed to keep their doors open,” Zook said. “This is going to be an expensive and difficult issue in the next general session.”

Arkansas employers already pay a higher unemployment tax rate than neighboring states. According to federal data, Arkansas unemployment taxes as a percent of total wages paid is 0.76%, higher than the national average of 0.66% and higher than the southern states average of 0.48%.

“We’re doing everything we can to mitigate the increases, but at the end of the day there will be significant added costs to your business for the unemployment insurance program,” Zook said.

POSSIBLE SOLUTIONS
New Arkansas legislative solutions may have to wait until 2011 because only budget items are supposed to be considered in the 2010 Arkansas General Assembly.

But Zook said the chamber is encouraging state and federal officials to be more proactive in discussing solutions now, because the existing $18.3 billion debt states have with the federal government could balloon to $90 billion by the end of 2012.

“The first thing we would want to see is a full and realistic accounting of the problem and challenge so we know what we might be facing,” Zook explained.

Beebe spokesman Matt DeCample said there are several options the feds might take to alleviate the significant debt resulting from unemployment benefit payouts related to the deep recession. One of those options could include full or partial debt forgiveness.

“There is not much we can do until we know what the feds might do,” DeCample said. “I think there are a lot of directions this could go.”

According to NELP, the federal government could require states to act within 2 years of incurring debt to begin repayment. Another option the feds have is to reduce the FUTA “offset credit” for a state’s employers until the debt is repaid. Also, the feds can take on an interest payment on the outstanding debt.