Won’t fix structural problems in unemployment fund

An expected federal proposal could give Pennsylvania a break on paying interest and penalties on more than $3 billion in federal unemployment compensation debt, but lawmakers and the business community say bigger changes are necessary.

Pennsylvania borrowed $3.29 billion from the federal government to cover unemployment payments, the third most in the nation after California ($9.91 billion) and Michigan ($3.73 billion), according to the U.S. Department of Labor. The unemployment debt averages out to $251 per capita for Pennsylvania, the sixth highest amount in the nation.

Thirty states plus the U.S. Virgin Islands have combined to borrow more than $42.3 billion from the federal government to cover unemployment compensation funds drained by the recent recession. This week, the Wall Street Journal reported President Barack Obama will propose waiving interest and penalties on those loans for two years in an effort to help states rebuild their funds.

State Rep. Ron Miller (R-York), chair of the House Labor and Industry Committee, said the plan could be great news for the state’s insolvent fund.

“We can use this as a breather and try to get back on our feet,” said Mr. Miller.

He said the General Assembly needs to look at serious changes to the structure of the fund, including cracking down on fraudulent unemployment payments. A U.S. Department of Labor report last year said Pennsylvania paid out $374 million in fraudulent payments in 2009.

State Sen. John Gordner (R-Columbia), chair of the Senate Labor and Industry Committee, said reducing or postponing interest payments would do nothing to help rebuild the state’s structurally insolvent fund.

“It would help businesses with the changes they will face, but it does nothing to rebuild the fund,” said Mr. Gordner. “It is structurally insolvent and even an improvement in the economy will not correct it.”

Mr. Obama’s plan would provide a new waiver on interest payments until 2014, in line with a proposal pushed by the U.S. Chamber of Commerce. However, the proposal will increase the amount of worker’s income subject to federal unemployment taxes from $7,000 to $15,000 in 2014, according to the Wall Street Journal.

Samuel Denisco, director of government affairs for the Pennsylvania Chamber of Business and Industry, said the tax increases would “absolutely” have an impact on jobs in the future, though the hope is the economy will have recovered by then.

He also cautioned the higher tax rate could be a harbinger of an expansion of benefits.

“There is this mantra in Washington to modernize the unemployment insurance for the states. They want to expand benefits and we think that’s a step backwards for the state,” said Mr. Denisco.

Mr. Gordner also warned of “dangerous strings attached” to the federal proposal which could set the stage for further increases in benefits. He said the expansion of benefits is what put the state in the current situation.

When the laws governing the state’s unemployment fund were last updated in the 1980s, they capped revenues going into the fund but did not cap benefits being paid out.

“So there is one line which flattens out and another line which keeps rising. Now, the two lines have crossed,” said Mr. Gordner.

Under current law, employers pay a 6.2 percent federal tax on up to $7,000 of their employees’ salaries. The federal tax is supplemented with a state tax, which in Pennsylvania can range from 1.5 percent to 9.2 percent on up to $8,000 of their employees’ salaries, depending on the size and history of the business.

However, Pennsylvania has borrowed so heavily that a variety of tax increases have kicked in at both the state and federal level.

A series of “solvency measures” – including a 0.65 percent tax increase on employers, a 0.08 percent contribution increase for employees and a 2.3 percent benefit reductions – are running at their maximum levels. With the added measures, the highest possible state unemployment tax on employers has climbed to 10.3 percent, according to the state Department of Labor & Industry.

A spokesperson for the department said the measures will remain in place “for the foreseeable future.”

Additionally, employers are responsible for a new 0.44 percent tax for interest payments to the federal government, which began in January when the waiver on unemployment debt payment included in the federal stimulus package expired. Those payments are made in the form of two new taxes – one which goes towards the interest accumulated by the state’s loans and one which pays off the principal.

Mr. Obama’s proposal would have no impact on the higher taxes paid at the state level or the structural problems in the unemployment fund. Those issues fall to the General Assembly and Gov. Tom Corbett.

Both Mr. Miller and Mr. Gordner said the General Assembly is waiting for Mr. Corbett to name his Secretary of Labor and Industry, one of two top administration positions yet to be nominated by the new governor.

An appointment is expected within the next week, though the governor has yet to make a decision.

Democrat chairs of House and Senate Labor Committees did not return calls for comment.