RALEIGH — Contrary to recent media reports, North Carolina has taken out federal loans to operate its underfunded unemployment insurance system, and it is the state’s obligation to see that $2.5 billion debt is repaid, said Dale Folwell, state assistant secretary of employment security.
“Most rating agencies look at this as a real liability to the state because the request … comes from the governor to the U.S. Department of Treasury,” Folwell said.
News stories from the Raleigh News & Observer and WRAL-TV have floated the notion that the state’s business community is on the hook for that debt, not the state itself, because employers pay the taxes that fund the unemployment insurance system.
In a Nov. 30, 2012, letter to state Rep. Julia Howard, R-Davie, state Treasurer Janet Cowell broached that concept in discussing methods for retiring the state’s federal unemployment insurance debt. Those included a general obligation bond secured by employers’ future federal unemployment tax payments with an estimated $100 million to $200 million in savings.
“Issuing a bond would shift the liability from the private sector to the state and runs against our strong history of conservative debt management,” Cowell wrote.
UPDATE: But according to the State of North Carolina’s official financial statements, published each year by the Office of State Controller, the borrower legally liable for federal unemployment-insurance debt is not in dispute. The report lists the Unemployment Compensation Fund as one of state government’s largest enterprise funds. Its inflows, outflows, and net assets are included in the state’s income statement and balance sheet.
“In February 2009, because of depleted cash balances,” the 2012 edition of North Carolina’s Comprehensive Annual Financial Report states, “the State began borrowing from the U.S. Treasury to ensure the uninterrupted payment of State unemployment benefits” (p. 40). The 2012 report was issued by David McCoy, the state controller serving under former Gov. Beverly Perdue. A PDF of the 304-page statement is available here.
David Jacobson of Moody’s Investors Service in New York said Michigan and New York were the only states to issue unemployment bonds in the past three or four years.
He said North Carolina is in “an interesting situation” with its unemployment continually above the national average and its attempts to pay down the federal debt triggering a reduction in jobless benefits, neither of which should impact its AAA credit rating.
But he declined to say whether the markets view unemployment debt as a state obligation to repay or a liability borne by the private sector. Nor would he speculate how markets would react if North Carolina stopped sending debt payments on the premise that it is the duty of employers to ensure payments are made.
Folwell said he would let others “argue about semantics” of who must pay the outstanding liability.
“Every three months I draft a letter that the governor signs asking that our [unemployment] trust fund be able to borrow money to pay out benefits,” Folwell said.
Such letters to the U.S. secretary of labor by both former Gov. Bev Perdue, dated Sept. 7, 2012, and current Gov. Pat McCrory, dated June 6 of this year, are nearly identical.
“I hereby apply for repayable advances to the account of the state of North Carolina in the Unemployment Trust Fund from the Federal Unemployment Account in such fund for the months of October, November and December 2012. This is our sixteenth request following an initial application for January, February and March 2009,” Perdue’s letter said.
McCrory’s letter closely resembled Perdue’s, with the exception of seeking the state’s 19th advance for July, August, and September of this year, and the amounts requested. McCrory asked for $150 million in July and September, and $125 million in August. Perdue sought $175 million last October and $150 million for November and December.
Given that line of credit, Folwell was asked whom the federal government would pursue if payments were not made.
“I think they’d come after [the state], and I think that’s the way rating agencies also look at this, an unfunded liability” for the state, Folwell said. It would be an appropriate analogy to compare unemployment borrowing to the state using its full faith and credit when issuing construction bonds for a third-party project, he said.
Folwell concedes the federal-state unemployment insurance cooperative is unique in that taxes funding the system come from one source — the state’s employers.
“This is an employer-driven system that includes employers of all types,” Folwell said. “Whether they’re business, nonprofit, or the state, or local government … hospitals, cities, counties, school systems, all of the above,” they must pay into the system.
Some critics of the state’s decision to reduce the maximum weekly unemployment payout and scale back the number of allowable weeks of benefits claim the state is giving businesses a break at the expense of the jobless.
But Folwell says the state has done more than just cut benefits.
Employers will have paid $2.1 billion from the time the state began borrowing to pay its unemployment claims in 2009 through 2015, according to Folwell. That payment structure is separate from the elements of House Bill 4, the solvency/reform bill passed this session.
That $2.1 billion includes a 20 percent surcharge that is triggered when the Unemployment Insurance Trust Fund falls below $1 billion.
Folwell said the state’s $2.5 billion federal debt built up over many years.
“This is like an ant eating a ham biscuit. It happened one bite at a time,” he said.
Folwell cited unemployment tax cuts that were enacted to enhance the state’s business climate, along with recessions in 2001 and 2008, when unemployment spiked and the state’s reserves were insufficient to meet demand.
But there are other problems with the system that Folwell is targeting for action.
“I always want to take an opportunity to talk about waste, fraud, and abuse, and how that translates into this debt that we owe,” Folwell said.
“There are a lot of things that were happening intra-agency where the claimant got [his] money, the employer was not charged, but the trust fund took a hit,” he said.
“It had to do with the area of what they call substantial fault, where it wasn’t easily determined whether a person was qualified or disqualified [for benefits], and it’s been on the books for 36 years,” Folwell said.
Substantial fault is a provision disqualifying a discharged employee for unemployment benefits due to acts or omissions related to reasonable job requirements.
“There’s a lot of things like that that we’re zeroing in on going forward,” Folwell said.
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.