Gov. Steve Beshear announced Thursday that the state has fully paid a $28.2 million bill from the federal government for interest on funds borrowed for unemployment insurance. The payment preserves a critical federal tax credit for Kentucky businesses, prevents the loss of some $30 million in federal administrative funds, and avoids a costly special session for legislators.
The federal interest payment, due by Sept. 30, had been waived for nearly two years as a majority of states borrowed funds to shore up inadequate unemployment insurance accounts in the wake of the deep national recession.
“Over the last year, we have worked closely with Kentucky’s business leaders to aggressively pursue every conceivable kind of federal relief from this interest payment,” Beshear said in a press release. “It is clear that in this political climate, Congress is not interested in helping states to protect businesses as our economy rebounds. We have taken matters into our own hands.”
Kentucky is one of 29 states that face significant interest payments on borrowed unemployment insurance funds. Nineteen of those states have statutory assessment mechanisms in place to collect the needed interest funds from businesses; the remaining 10 states, including Kentucky, must find other means to make their interest payments.
In the coming weeks, Beshear will gather a consortium of business and labor leaders and unemployment insurance experts to find a permanent solution to the current and future interest issue. Legislators must approve a mechanism to fund the interest payments in the upcoming session.
The Kentucky business community -- including the Kentucky Chamber of Commerce, the Kentucky Association of Manufacturers, the Kentucky Retail Federation, and the Kentucky Chapter of the National Federation of Independent Businesses -- worked with Gov. Beshear to press Congress to extend the moratorium on interest payments or to find some other solution that did not cause additional painful costs to businesses. A bipartisan group of governors also joined this effort. To date, Congress has taken no action on this issue.
Kentucky Education and Workforce Secretary Joseph U. Meyer traveled to Washington, D.C. last month to speak directly to the U.S. Department of Labor about pursuing administrative relief for Kentucky. The federal agency failed to provide alternatives.
After exhausting all possible options for federal relief, Beshear authorized the full payment of Kentucky’s interest bill. State law mandates that these interest payments be paid in a timely manner from the Unemployment Insurance Penalty and Interest Account. That account had a balance of $9.8 million, and Beshear authorized loaning the remaining $18.4 million to the account from the Commonwealth’s management of its overall cash flow.
This internal loan will be managed similarly to other funds where the timing of revenue intake and spending differs within a fiscal year, such as with the Tobacco-Master Settlement Agreement Funds. The $18.4 million internal loan must be repaid by the close of Fiscal Year 2012.
Principal on the federal loan can be repaid with Unemployment Insurance Trust Fund monies, but interest on that loan must be paid from a separate account per federal and state law. A payment mechanism is already in place to pay off the principal of the federal loan over seven years.
The state also borrowed federal funds in the early 1980s to make unemployment insurance payments due to a national recession, and paid the interest on that loan with funds from a statutory assessment on employers; however, that law was repealed by legislators in the 1990s.
By paying the interest in full, Beshear’s action preserves the Federal Unemployment Tax Act credit for Kentucky businesses. The payment also ensures that the federal government will not rescind approximately $30 million in administrative funding to operate the unemployment insurance program.
Some legislators had called for a costly $60,000-per-day special session to authorize payment of this bill, which Beshear repeatedly said was unnecessary.
“This was the first of many interest payments that will be due on the federal loan. The General Assembly will need to find a permanent solution to the interest repayment issue in the upcoming general session, so there was no need to call lawmakers in early to do so,” said Beshear. “Our state’s business leaders are aware that action must be taken, and I am confident that lawmakers can find a workable solution at that time.”
Inherited Problem, Bipartisan Solutions
In 2007, the Beshear administration inherited a chronically underfunded Unemployment Insurance Trust Fund. Every year since 2000, more money has been paid out of the Unemployment Insurance Trust Fund than has been deposited into the Fund by employers. When the recession hit in 2008, it forced more people onto the unemployment rolls, worsening the problem and quickly draining the Fund of its remaining balances. At that point, Kentucky and many other states began borrowing money to make unemployment benefit payments from the federal program designed for such emergencies. To date, states have collectively borrowed nearly $40 billion to support unemployment insurance programs.
In 2009, the governor brought together a bipartisan task force of business and labor leaders, legislators, and unemployment insurance experts to develop a plan to bring the Unemployment Insurance Trust Fund back to solvency, pay off the principal on the federal loan, and meet the needs of workers and employers in the future. That task force proposed a balanced solution which required changes to both benefits and funding, which the legislature adopted in 2010.
At the time the Unemployment Insurance Task Force concluded its work, there was an expectation by many states that the federal government would extend the moratorium on interest states would owe due to the national recession. As a result, the bill enacted by the General Assembly to reform the system did not address the interest payment mechanism. However, the issue was explained in the Unemployment Insurance Task Force final report, and the Education and Workforce Development Cabinet provided testimony on many occasions to legislative committees about the issue in 2009, 2010 and 2011.