State Government,Taxes and Budget

Friday Interview: Tackling North Carolina’s Unemployment Debt

JLF expert offers ideas to help the state dig out of its $2.8 billion hole

Apr. 13th, 2012
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Fergus Hodgson

RALEIGH — North Carolina owes the federal government $2.8 billion the state borrowed to pay unemployment benefits since the depths of the Great Recession. Fergus Hodgson, John Locke Foundation director of fiscal policy studies, says the Tar Heel State has dug a particularly large fiscal hole for itself. He discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Martinez: Here in our state, how long can someone collect unemployment benefits, and how much?

Hodgson: The total, including federal contributions — it’s actually 99 weeks, almost two years. The state contribution is 26 weeks, so around half a year. In terms of how much, the average rate — there are differing numbers, but the average amount for people not receiving other payments or contributions from part-time jobs or whatever it may be — they get $293 per week, which is substantially more than a minimum-wage job, actually.

Martinez: And this can go on for as long as 99 weeks.

Hodgson: Correct.

Martinez: Are there special requirements to go that long?

Hodgson: No. The requirements on the individual — there are no additional requirements. All people who go into the program can stay for the full 99 weeks. The requirements beyond the 26 weeks are from the federal level. The federal government offers extensions up to 99 weeks if you have a certain level of unemployment, and because North Carolina’s level of unemployment is 10 percent, that’s high enough to go to the whole lot. Some states receive less. Virginia, for example. I think they receive around 55 or something — much fewer weeks — because their unemployment rate is not as high as ours.

Martinez: So presumably, North Carolina is paying out unemployment checks year-round, even in the best of times.

Hodgson: Sure.

Martinez: But then we’re hit with this really severe recession.

Hodgson: Right.

Martinez: So at what point did North Carolina say there’s no more money in the bank?

Hodgson: Well, the point arrived in January 2009 — that we actually got to zero in our trust fund. But our trust fund had been going downhill for about a year-and-a-half prior to that point, so we actually had time to address this before we got to zero, but no one did anything. But since 2009, things have gotten a lot worse, and gone to $2.7 billion in the negative. [Note: Since this interview, the debt has increased to $2.8 billion.] So we did have a trust fund built up — I think it was around $500 million, maybe in 2007 — but at that point, we lost $200 million or $300 million every year. And then in 2009, it went crazy, and we lost almost $2 billion in one year.

Martinez: So when you say we lost it, what do you mean?

Hodgson: That just means that the revenues the state collected from the unemployment insurance taxes were far fewer than the payments they were making out. And in 2009, there was $1.8 billion in the negative, and that’s a hard amount of money. That’s a lot of money to pay back.

Martinez: Who pays into this fund?

Hodgson: It’s a mandatory payment upon all [employers]. I think there are some exceptions — I think maybe very small groups — but basically it’s universal. And the tax structure is more — I don’t want to say complicated — but there are two forms of tax. There’s a state tax, and that varies depending on your employment history — as an employer, how many people you’ve fired. If you fire more, you pay a higher rate. There’s also a flat federal tax, which pays for the administration of the program.

Martinez: Basically, it sounds as if we were going along, the fund was starting to get a little bit lower and lower, and then we’re hit with the big recession.

Hodgson: The problem is the recession. Perhaps when the funds started to get depleted, people didn’t realize that this was going to continue. And it continued. And it even got worse going into 2009, so that’s when red flags should have been going up at that point in time — that we are in a very bad situation. But, of course, more than two years have passed since then, and still nothing has happened. Still, we’re going into negative. Still, we’re losing $250 million a year.

Martinez: But we owe $2.7 billion to the feds right now.

Hodgson: Correct. Yes.

Martinez: Because when a state runs out of money, where does it turn?

Hodgson: Well, the fund just goes into negative. The trust fund that the federal government holds for us just goes into negative. And, yes, that comes with consequences — both interest and an additional tax on us each year. For each year we’re delinquent or insolvent, we’re going to have to face a higher tax and interest payments.

Martinez: What do we need to do in order to pay this back or bring this fund balance back up to zero or in the positive?

Hodgson: There are a few ways to go about this. First, the fact is we have to cut the balance, which basically means either increasing revenue or decreasing payments. We can be more accurate in our payments; around 9 percent of payments are actually in error.

Martinez: That’s a huge amount.

Hodgson: Right. But this program is considered liable to error. … Other states have far higher levels. In Louisiana, where I worked in the past, there was actually, I think, 39 percent, or some crazy amount of payments, that were in error. So North Carolina does have some ability to actually cut down on cost in terms of accuracy, but even if we halved that, it would only save around $100 million a year. So it’s not enough.

The status quo is that we’re increasing taxes. There are many problems with that. As of now, North Carolina already has the highest unemployment insurance taxes of its neighboring states, and small business councils actually identify this as a problem in terms of public policy friendliness. So we’re already dissuading small businesses from coming here, or small or large — anyone who has to pay it. So I’ve proposed that we make what are actually relatively simple cuts. That’s to say that we reduce the number of weeks we offer from 26 to 20, at the state level. That would save around $300 million. We could also reduce the benefit generosity to be in line with South Carolina’s level, and that would save another $250 million.

Basically, we could turn around this gap. I will say that actually South Carolina found itself in a similar position to North Carolina, but it’s already acted before us to resolve it, and they reduced the number of weeks. So what I’m proposing is that basically we follow their lead. And it’s not only South Carolina. Missouri and Michigan have done this, too, also finding themselves in difficult positions.

Martinez: Even though other states have done this, you have to realize that as soon as you start saying we’re looking at decreasing benefits to people who are unemployed, particularly the long-term unemployed, the first thing critics are going to say is, “That is coldhearted. That is draconian. You’re trying to balance a budget on the backs of poor people or people who are in dire circumstances.”

Hodgson: We need some context to that. First, we have to realize that we collect unemployment insurance taxes to pay for the benefits going out. But evidently, the taxes we collected weren’t near enough — still are not near enough to cover what we’re paying out. So basically, we, at this point, are paying out benefits way too generous relative to what we’ve been taking in. And that means, for example, that we have a similar tax rate to what Tennessee has, but we pay out far higher benefits, and Tennessee has a solvent trust fund.

In terms of how people will feel the pain in terms of cuts of this regard, there’s good evidence to indicate that, of people who finish their benefits, one in three of them find a job within one week. And in my report on this, I highlight an example which should be somewhat of an embarrassment to people who make the claim that I’m heartless. There’s actually a flower wholesaler or processor out in western North Carolina who fired 80 workers to comply with E-Verify. So these were illegal immigrants. Even after two years amid this Great Recession and unemployment rates of 10 percent across the state — or higher — he’s not been able to find replacements. And he was saying how, basically, the incentive for local people to work is just not there. They’re going to hold off for supposedly better opportunities.