Louisiana Democrat Gov. John Bel Edwards, in his quest to avoid right-sizing state government and introducing fiscal reform fueled by the imperative of the Wuhan coronavirus pandemic, finds himself wedged between a rock and hard place because of unemployment insurance changes.
Prior to the crisis, the state found itself in good shape on this account. States collect from employers (adjusted for experience) and employees (twice that for the self-employed) a tax that goes into a fund held by the federal government on their behalves, from which they can draw upon if current benefits payouts exceed tax intake. Louisiana collects and pays out in ranges and on average among the lowest amounts among the states, but had collected a nice cushion in its fund because of a number of policies – such as having no Short-Time Compensation program, typical earnings base and duration of benefits receipt, and (until Edwards waived it in late March) a waiting week for receive benefits – prevented aggressive distribution of benefits.
That thrift the federal and state pandemic responses now will put to the test, creating a two-fold budgetary problem. One is that unemployment insurance policy hastily created in the aftermath of the virus’ descendance onto society has the counterproductive impact of creating more unemployment and less economic activity, causing state government costs to rise and revenues to fall.
This comes from the extreme generosity of the temporary federal changes. First, the government extended, until the end of the year, the normal Louisiana maximum period of drawing benefits from 26 to 39 weeks. Second, it created entirely new pools of federal money from which to draw, forcing the state to cover people never before eligible for benefits through the end of the year. Third, it qualified all eligible recipients, of both previously covered and uncovered individuals, for an extra $600 a week drawn from federal money through the end of July.
All told, it creates a significant disincentive to work, foremost of which being the $600 spike. Consider that at the end of 2019 Louisiana had an average weekly benefit of just under $217. This 277 percent increase on top of the existing benefit comes out to an annualized figure of $42,467 (before taxes; these benefits count as income) for not working at all. It creates every incentive to stay unemployed and to keep drawing upon the Louisiana portion. Also, the bill for the newly eligible class of recipients (but not the extra supplement) and for the extra weeks for all the state must foot. (Keep in mind that Louisiana taxpayers also will be charged for a large portion of the federal money sprayed around to the state’s unemployed.)
Circumventing this sabotage to economic recovery and threat to state finances was the intent of Republican state Rep. Beau Beaullieu’s HB 620, which would have capped total benefits at the weekly salary of a recipient’s previous job. Unfortunately, the new federal laws prevent reception of the supplement under that scenario, so he pulled the bill.
Shills for Edwards opposed that, because Edwards doesn’t think badly of wealth redistribution. But he does care about how the ocean of benefits now spewing from state coffers endangers his plans to keep state government oversized.
At the current rate of consumption – again, made artificially higher by federal government policy discouraging work – Louisiana will run out of its banked reserves by the start of September. Ending the $600 weekly bonus will help, but it now seems inevitable that the state will exhaust its bankroll and have to start borrowing from the federal government – especially if Edwards continues to drag his feet in reopening the economy that suppresses having employers pay into the system.
As it stands, if Louisiana must borrow, it wouldn’t have to pay back the money until the following November, in the fiscal year 2022 budget. However, if it fails to, it still will owe the money and a penalty applied that makes rebuilding its trust fund more difficult, costing the state more over the long haul, as well as making employers in effect pay more in taxes.
So, a day of reckoning would come for Edwards although, at this point battling a Legislature looking capable of ramming down this throat plenty of legislation at odds with his policy agenda while stifling his own preferences, he just looks to survive day-to-day. Salvaging the session for him starts with getting a bloated budget past legislators relying heavily on temporary, disappearing federal dollars (in repudiation of his campaign rhetoric) from the CARES Act.
Unfortunately for him, the math doesn’t work out, with too few expenditures in state government next year qualifying for that one-time money. But even if he could shoehorn it in, he may come to realize that resources available in the CARES Act pot, or just over $1.8 billion, won’t stretch as much as he likes.
First, the state already has spent (as of 12 days ago; updates since haven’t surfaced) $118 million on disaster response above and beyond ordinary budgeted expenses. It also will have extra expenses associated with Medicaid estimated at $202 million for this and next budget year. Pressure will build for it to ship some of the loot to local governments to pay for eligible expenses at those levels; New Orleans reports a $150 million deficit in the offing and Shreveport looks to close a $25 million gap (which the Legislature may force upon Edwards to the tune of at least $100 million.)
However, the CARES Act does allow use of these funds to refill unemployment trust funds. Assuming half of the current burn rate through the remainder of the year after exhaustion, or 16 weeks at $26.25 million a week, the state would have to borrow $420 million just to stay out of the red, and more if at year’s end the immediate future trend still shows more going out than coming in.
That begins pulling a chunk of the $1 billion Edwards would try to shunt – even if illegally – to prop up state government this next fiscal year, past all of this other additional spending and emergency spending yet to come. And that task becomes harder if, as looks probable, the Legislature withdraws some revenues for next year through tax relief to keep struggling businesses afloat which at this point could hit the $1 billion mark.
Thus, it may become a choice for Edwards to pay now – by ensuring the state doesn’t have to borrow for its trust fund at the expense of cutting the budget – or later – by keeping a bloated budget but setting the state up for costs down the road.
You know Edwards if he had his way would push off the costs of his policies to the future, either in the hope some kind of savior like the federal government steps in to subsidize his expensive tastes or that he can keep kicking the can down the road to inflict the consequences of his tax-and-spend agenda on the next governor. The Republican-led Legislature stands in the way of that short-run profligacy, and hopefully it will act contrary to it in the state’s long-tern interests.