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December 20, 2011 | By | Posted in Legislature

PA House backs borrowing $3.5B to pay unemployment debt

Only a short-term solution, lawmakers warn

By Stacy Brown | PA Independent

HARRISBURG — Pennsylvania lawmakers, in effect, put a Band-Aid on the state's unemployment compensation problem.

The House voted Monday earlier this week to use bonds to pay off the more than $3 billion the state owes the federal government, saving employers $50 million in 2012.

The bonds would help avoid any potential tax hike, which Gov. Tom Corbett and most lawmakers oppose.
 
The action authorizes the state Department of Labor and Industry to borrow up to $3.5 billion at an interest rate that's expected to be at least 2 percentage points lower than the 4 percent charged by the federal government.
 
“It is urgent we get this bond issue done, so that we can repay the federal government for the contributions they made during our periods of high unemployment,” said state Rep. Bill Keller, D-Philadelphia, Democratic chairman of the House Labor and Industry Committee. “Paying back that money will allow us to turn our focus toward a long-term solution for our (Unemployment Compensation) Trust Fund insolvency problems."
 
However, Keller said lawmakers should not consider using bonds as the ultimate fix.
 
“There is the (Unemployment Compensation) Trust Fund solvency problem, which exists because Pennsylvania has been stuck in a time warp when it comes to addressing the long-term needs of our unemployment compensation system,” Keller said.
 
The fund is insolvent, Keller said, because Pennsylvania has failed to update the taxable wage base on which employers are taxed, currently at $8,000 per employee.
 
Employers also received significant unemployment compensation tax breaks in the 1990s during good economic times, so the fund was not prepared to cope with bad economic times, he said.
 
State Rep. Bill DeWeese, D-Greene, the lone vote against the measure, said he was concerned about what he projects to be a lack of competitive bidding for the bonds.
 
However, House Republican Leader Mike Turzai, R-Allegheny, called the proposal a "common-sense measure" and said there would be competitive bidding for the bonds.
 
"This is not new borrowing; it's a refinance of existing debt," Turzai said.
 
The state's Unemployment Compensation Trust Fund has borrowed $3.8 billion from the federal government since 2009 to pay local unemployment compensation benefits to those who lost their jobs during the Great Recession.
 
The government required the state to start repaying the borrowed money beginning in January, which triggered an interest tax on employers to help make those payments.
 
Had the bill failed, employers would have been forced to cover $104 million in interest this year and they would lose a portion of a federal business tax credit each year that the state owed the federal government beginning in 2012.
 
Next year, the loss of those tax credits would have cost Pennsylvania employers an additional $110 million, with higher amounts expected if the debt remained on the books.
 
The state Department of Labor and Industry estimates that employers will save between $160 million and $265 million, depending on how the repayment of the bond is structured, according to a Senate Republican fiscal note. About $110 million of those savings will go toward repaying the private bonds, so net savings will total about $50 million.
 
The Senate will review the measure before it heads to the governor for his consideration.
 
Sam Denisco, vice president of government affairs at the Pennsylvania Chamber of Business and Industry, which represents businesses in the state, said even though the bill failed to address the fund’s long-term solvency, the chamber supports it.
 
Paying off the government by means of bonds is akin to having a credit card with 20 percent interest and transferring the balance to another credit card with only 3 percent interest, Denisco said.
 
The Pennsylvania AFL-CIO, a coalition of labor unions in the state, originally opposed the measure.
 
Previously, it sent a notice to members and supporters that said the bill would provide additional savings to employers, but would continue to discourage solvency in the fund.
 
"We think the House worked out some of the things we had problems with such as the bond being used to pay off the debt," said Richard Bloomingdale, president of Pennsylvania AFL-CIO. "This allows employers to keep federal unemployment tax credits and hopefully it will lead to increased employment.”
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