Last month, the North Carolina Legislature enacted legislation to corral its expanding federal debt for unemployment compensation (UC) benefits to its unemployed.
This is because North Carolina is among 18 states whose UC trust funds were bankrupted by increased claiming brought on by the recent recession. These states borrowed from a federal UC trust fund to cover the benefits they have statutorily obligated themselves to pay. Collectively these loans total more than $21.2 billion, and the states are paying interest on them. California’s debt alone represents $8.7 billion of the amount – more than 40 percent – and dwarfs North Carolina’s nearly $2.2 billion debt.
The U.S. unemployment system is a federal/state partnership. If a state meets certain federal requirements – and all do – it is allowed to have its own individualized system wherein it establishes benefit levels, taxing structures and qualifications for receiving benefits. Every state has its own trust fund, accumulated through taxation. Like almost every state, Louisiana’s is exclusively funded by its employers. In addition to their state UC tax, employers pay a federal UC tax, some of which goes toward the administrative costs of the federal and state UC systems, and a portion of which goes into the federal fund used to make loans to cover a state’s benefit obligations when it cannot.
Louisiana can relate to the challenges North Carolina is facing today. During the recession of the 1980s, driven by the collapse of its oil and gas industry, our state was likewise forced to take drastic action. The recession’s hit to our UC fund was immediate and devastating, bankrupting it in less than a year. The Legislature was forced to raise employer taxes and lower benefits in an effort to slow the hemorrhage.
Like North Carolina, Louisiana borrowed money from the federal UC fund, and within five years, amassed over $700 million in debt. Just as today, that federal loan came with interest charges and the threat of extra federal taxes, and Louisiana’s employers struggled under the weight. Business and labor eventually joined together to support legislation authorizing a bond issue to pay off the debt. Employers paid a special assessment to retire the bonds, which was accomplished more quickly than expected.
To prevent a recurrence of the insolvency that cost employers so much back then, a system of "triggers" was established relative to our UC fund’s balance. In times of high unemployment, as the fund declines, tax increases and benefit reductions are triggered at certain levels to ensure fund adequacy. Right now, Louisiana’s relatively healthy $830 million fund balance is below the first trigger. So, Louisiana employer taxes are a bit higher and UC benefits are a little lower, but not as severely as what North Carolina must now endure.
To address its debt, the North Carolina Legislature has taken a page from Louisiana’s book. It also authorized a bond issue to pay off its debt. North Carolina’s Legislature then focused on the state’s very generous benefits. Just like Louisiana’s benefits in the early 1980s, North Carolina’s were highest in the southeast and among the highest in the country. So, its Legislature lowered the maximum weekly benefit by more than 34 percent and tightened some qualification requirements for receipt of benefits.
It remains to be seen whether these changes are enough to turn things around for North Carolina. Louisiana required five legislative reform packages to be enacted between 1983 and 1990 before it finally restored balance to its system. North Carolina is making its way down a road Louisiana traveled three decades ago. Hopefully, like Louisiana, it will also have the wisdom to establish a UC tax and benefit system that ensures it does not go down this road again.