SADOW: Louisiana’s Unemployment Fund Mess Is A Leadership Failure

Not only must Louisiana solve for its now-growing unemployment benefit trust fund deficit, it must do it in the right way to prevent fiscal affront to taxpayers.

This week, Louisiana started borrowing for that from the federal government. A temporary federal law allows that to continue interest-free past Sep. 30 through the end of the year. In effect, that means the no-cost borrowing can continue through Sep. 30, 2021 as long as no borrowing then occurs until the end of 2021; if not, all of 2021 debt gets levied. On Jan. 1, 2021, it must pay interest at the long-term Treasury bond rate for any 2020 balance, an amount due which may be adjusted daily, up to November 2022, when additionally a penalty increasing the federal employer rate kicks in, which can keep increasing the longer more debt remains. Moreover, charged interest payments can’t come from the fund itself, but from an external source only; in Louisiana, a “solvency tax” triggers to pay off interest whenever the fund is forecast to fall below $100 million, applied from six to nine months later for at least three months.

As of now, the state forecasts – unofficially – a deficit of $236 million by year’s end. In other words, taxpayers will take a hit unless the debt is zero by year’s end, which seems unlikely.

The state can’t do anything about that. But lawmakers in the current special session propose to alter state law, either by its suspension or temporary change for much of or all of 2021, to roll back state provisions that cut benefits and increase business taxes when the fund balance falls below $750 million, retaining the same higher maximum benefit level and tax payment level as if the balance rested between that and $1.15 billion.

Interestingly, the state at this time last year was closing in on the $1.1 billion level. Instead, as a result of the Wuhan coronavirus pandemic, Louisiana will go into the red for the first time since 1987, back in an era when tanking oil prices coincided with a free-spending state government to cause a fiscal crisis.

Then, the state faced fewer restrictions on borrowing for noncapital spending and on fiscal discipline in maintaining a trust fund balance, and it actually borrowed $1.315 billion from private markets to refill the fund and then some. By having some of strictest qualifying criteria and least generous payouts, by 1994 not only did Louisiana pay off the loans (at only an estimated $47.6 million above what in retrospect it would have cost to go through the federal government, although it avoided the penalty rate imposed on employers), but it soon had a healthy surplus. Reforms shortly after which created the current stringent tax/benefit regime by the start of 2002 left the balance over $1.4 billion, or in the lowest tax/highest maximum benefit category.

That began sliding from the after effects of the terrorist attacks in 2001, bounced back from relief provided for the hurricane disasters of 2005, but took another hit after the 2008 recession. It had rebounded by the start of Republican Gov. Bobby Jindal’s second term to over the $750 million mark and by its end was cruising towards $1 billion. It stalled during most of Democrat Gov. John Bel Edwards’ term but started back upwards last year.

Now wiped out, unless policy-makers want to embark on an essentially permanent change in law or years’ worth of temporary suspensions, taxes will go up and benefits down because it will take awhile to corral about $1 billion. Note that refusal to take the medicine, as legislative instruments currently under discussion would do for at least eight months, makes it harder to get back up to this level.

Understandably, with the worst state economy as a result of Edwards’ pandemic response, legislators don’t want taxes on businesses (hence passed on to consumers) to rise or see unemployment benefits cut when some joblessness has come as a result of the governor forcing businesses to stay closed or to attenuate services. So, the first order of business must be to end the counterproductive restrictions Edwards has insisted on keeping in place.

That by itself won’t solve for the deficit, but it could mitigate it somewhat by the end of the year. Legislators also could try some fancy footwork with $106 million they set aside (that Edwards wanted to spend on capital projects) after a budget surplus last year. If they act quickly, either they can replace with it cash towards capital projects already funded and release that cash to pay off the loan or slide it into the Budget Stabilization Fund and attempt to launder it through there.

At present, the BSF holds $478 million, even after a $90 million drawdown for this year’s budget. Since it may release up to third of its balance, theoretically $189 million or so remains available. However, it could happen only if the Revenue Estimating Conference recognized a deficit in recurring revenues in this fiscal year prior to year’s end, which is uncertain, perhaps even unlikely as recently the REC was told at this time the state didn’t have a deficit.

Thus, likely the state would have to pass through the $106 million and make up the difference elsewhere. And it should not repeat the 1987 foray, not only as the interest rate (likely variable in nature but with a premium added for callable early status) probably would exceed that of the federal government’s in this low-rate environment, but also because this might violate the Constitution’s stricture against borrowing for recurring expenses. And suspending the solvency tax solves nothing; the interest must be paid from outside the fund somehow.

If Louisiana can just make it to the end of the year with a zero balance or better, it can borrow again through the first nine months of next year without interest as long as it returns to no deficit before Oct. 1. However, no extra money from the federal government’s CARES Act seems available for repurposing (all of the business relief grants, “hazard” pay for lower-income workers, and subsidies to local government appear allocated) to make up the difference.

Had Louisiana used CARES Act dollars to keep the fund topped off, as around a dozen states did, even if it meant trimming giveaways such as money to make movies, subsidies to work less and less productively, and health insurance they could afford on their own, it could have avoided this predicament where somebody will end up paying extra. It didn’t, and taxpayers will be the worse for it.



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