Opinion: Carolina Beat

No Time To Ignore Unemployment Insurance Hole

North Carolina’s $2.6 billion Unemployment Insurance debt is third worst in the nation. That debt generates both interest payments and federally mandated tax increases. Even after three years of insolvency, state legislators have failed to make any reforms, and the outlook of this fund continues to deteriorate.

The current trajectory, one of inaction, is not pretty; North Carolina is verging on a UI debt-of-no-return. The mandated tax increase of 0.3 percent of income, which went into effect this month, will not be sufficient to turn around the current $300 million annual shortfall (including interest costs), and even with subsequent increases, in just a couple of years the debt will amount to more than three years’ worth of the state’s entire UI tax intake.

At that point, repayment of the principal within any reasonable time frame would be all but impossible, let alone the buildup of reserves. And that’s even with the highest UI taxes of all the state’s neighbors.

But it doesn’t have to be that way. Last week, North Carolina legislators highlighted their concern with subpoenaed questioning of the chief of the Division of Employment Security. If they proceed to take action and tighten the state’s UI belts in the coming session, the state could repay its trust fund balance of negative $2.6 billion within seven years.

At $292 per week, North Carolina has the most generous UI payments of all its neighbors, 22 percent and 25 percent more than Tennessee and South Carolina respectively. That’s also 27 percent more than the after-tax earnings of a full-time, minimum-wage job.

By simply bringing North Carolina’s UI payment levels in line with those of South Carolina, legislators would save $250 million annually. That would eliminate immediately the shortfall between UI revenues and benefit payments, and depending on one’s projection, it would also come close to covering interest payments.

It would not, however, stop further federally imposed tax increases, an additional 0.3 percent each year. Nor would it be sufficient to go beyond the approximately $100 million of annual interest charges and actually repay the debt.

In 2009 alone, North Carolina officials spent $1.8 billion worth of UI benefits in excess of their revenues. In other words, they spent almost three times what they brought in. That kind of fiscal negligence, in order to be turned around, necessitates more assertive action.

Fortunately, other states, including Missouri, Michigan, and South Carolina — facing similar challenges — already have shown how this can be done. They have reduced their periods of state-funded eligibility from 26 weeks, North Carolina’s current level, to 20 weeks.

If adopted in North Carolina, the six-week reduction would generate annual savings of approximately $300 million. Combined with reduced benefit generosity, that would enable the state to clear the $2.6 billion debt in six years. Of course, building up a reserve again would take longer, but from that point on the dual federal-state program would be in a much stronger position to withstand future recessionary strains.

While the two reductions may bring difficulty for some recipients, keep in mind that the taxes they paid in have proved nowhere near sufficient to justify the generosity of payments that continue to go out. Additionally, the structure of the payments formula at present is unjust and, dare I say it, regressive.

High- and low-income earners alike pay in at the same rate — at least everyone earning beyond $19,700. The only variation in tax liability stems from an employer’s layoff history, not income levels. Yet, Division of Employment Security officials calculate payments based on a recipient’s highest quarter of wages from the previous year, so higher earners receive more generous benefits.

A formula redesign toward an across-the-board, necessities-only income between jobs offers a nonpartisan approach to scaling back the generosity of payments.

An overwhelming amount of research also indicates that less generous and fewer weeks of UI payments would decrease unemployment rates and reduce search periods. In fact, almost one-third of individuals who have exhausted their UI payments find work within one week. It may come as no surprise, then, that not only does North Carolina have the most generous UI payment of its neighbors, it also has the highest unemployment rate.

The most painless outcome to this dilemma is an environment in which employment opportunities are plentiful and fewer individuals depend on the UI program. So along with getting the state’s UI books in order, policies that free up investment opportunities and enable a more fluid labor market will smooth over UI difficulties. Of course, more government debt, an overly generous UI system, and mounting taxes on employers will do just the opposite.

Fergus Hodgson is director of fiscal policy studies at the John Locke Foundation.