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State faces decisions on money borrowed for unemployment fund

With the unemployment rate still hovering near 10 percent, Arizona has drained its jobless benefit fund, forcing the state to borrow millions from the federal government to help out-of-work residents.

Arizona owed the federal government $169 million as of Oct. 28, according to U.S. Department of Labor data.

The interest rate on that loan is zero through 2010, but in 2011 it will begin accruing interest at an estimated annual rate of 4.6 percent. And with the economy still struggling and most businesses not adding employees, officials expect that without action the balance will remain in the red into at least early 2013.

Robert “Bob” Burns, the outgoing Senate president, said the next Legislature faces hard choices about what to do about the fund, including whether to make employers kick in more money.

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“With unemployment being so high, and with no new people coming on board, there’s not a lot of money flowing into the fund,” he said.

Arizona is among 31 states, along with the U.S. Virgin Islands, that have depleted their funds and borrowed more than $41.1 billion among them to provide a safety net, according to the Labor Department.

The amount employers pay into state’s unemployment insurance fund adjusts within a cap based in large part on the number of Arizonans claiming benefits. But the rate is already at that cap, and the only way to raise it would be action by the Legislature.

Burns, a Republican from Peoria, sponsored bipartisan legislation last spring that would have imposed temporarily higher taxes on employers to return the fund to solvency. That bill cleared the Senate unanimously but was held in the House.

If the state fails to pay back the federal government and make the fund self-supporting by Nov. 10, 2012, it would begin losing federal credits that significantly lower their unemployment insurance tax burden.

Steve Meissner, a spokesman for the state Department of Economic Security, said that Arizona had one of the nation’s best-funded unemployment funds, with about $2 billion stockpiled before the slump.

Before the recession, about 28,000 people in the state were receiving jobless benefits, while recent DES figures showed that the number had now grown to 160,000.

“I don’t know how you plan for that in a responsible way without creating an undue burden for businesses,” Meissner said.

States are responsible for the first 26 weeks of unemployment benefits.

At present, Arizona businesses pay the state an average of 2.08 percent on the first $7,000 of each employee’s earnings, though employers that haven’t laid off workers pay less.

They pay the federal government 6.2 percent of the first $7,000 of each employee’s earnings, but the rate works out to just 0.8 percent for businesses because Arizona qualifies for credits under the Federal Unemployment Tax Act.

As of 2012, each November the state hasn’t paid off its balance businesses lose a larger share of those credits.

According to DES, the amount of federal unemployment insurance tax per employee could rise from $56 in 2011 to $77 in 2012, $287 in 2013 and $308 in 2014. But the federal government has discretion over the amount beginning in 2013.

Farrell Quinlan, Arizona director for The National Federation of Independent Business, said the business community realizes the importance of returning the fund to solvency but is still recovering from the recession. He said any tax increase needs to be as low as possible.

“We can’t afford to take more and more money out of the economy for something that isn’t creating new jobs,” Farrell said.

Arizona was one of the states with the recommended level of reserves going into the recession, said Andrew Stettner, deputy director of the New York-based National Employment Law Project, an advocacy group for the unemployed.

“The unemployment rate in Arizona has jumped quite dramatically,” Stettner said. “In a lot of ways, this has been really difficult to plan for.”

Meissner said it will be difficult to rebuild the fund unless the unemployment rate improves.

“The way you make these funds solvent is the same way you solve all the other economic problems this state is facing,” Meissner said. “You improve the economy.”

Attempts to raise the rate of unemployment insurance taxation would deter hiring, so it will take time to return the fund to solvency, Dennis Hoffman, a professor of economics at Arizona State University, said in an e-mail.

He said the rates were too low during good times because the state hadn’t anticipated an economic downturn on the scale of the recession.

“If you want to better prepare for the future, then raise the rate,” Hoffman said. “But clearly we need to get back to a healthy economy before we raise rates dramatically.”

Arizona has been offered up to $150 million in federal stimulus funding to apply to its unemployment program. But legislative leaders, facing opposition from business groups concerned about the possibility of having to pay more into the fund, haven’t been willing to make required changes that would loosen the criteria for receiving benefits.

Burns was unsure whether the state would accept the funds.

“How much pain can you suffer, while your arm is being twisted because of the budget situation we are in,” he said.

Facts about the unemployment fund:

• Arizona began borrowing in March 2010 from the Federal Unemployment Account.
• The state owed the federal government $169 million as of Oct. 28.
• Arizona is among 31 states, along with the U.S. Virgin Islands, that have depleted their funds and borrowed more than $41.1 billion among them to provide a safety net.
• States are responsible for the first 26 weeks of unemployment benefits.

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