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North Carolina is in line behind California and New York with the 3rd largest Unemployment Insurance (UI) debt in the United States.  North Carolina owes approximately $2.6 billion to the federal government and, due to our inability to pay on the federal loan, we have accrued $150 million in interest over the last two years.   Many are upset that legislative discussions have led to the decision to cut benefits for the unemployed in efforts to offset the loan balance.  In a House Finance Committee last Thursday it was made public that mandatory federal tax increases on NC businesses are being caused by the unpaid debt, thus businesses are going to get hit regardless of state action.  According to the NC Chamber, if nothing is done to shorten the horizon of paying back the debt, the federal government will continue to tax businesses 0.3% each year until the debt is paid — ultimately reaching $420 per employee. 

So how did all this start?  Initially UI was established by a federal mandate in 1935, which was followed by many small changes throughout the 20th Century.  The chart below outlines North Carolina’s UI progress since 1983 and gives a clear picture why the current problem exists today.  The most notable from the timeline is that North Carolina has increased benefit payouts and reduced employer contributions to the point of guaranteed default.


Federal Social Security Act created an Unemployment Insurance System


North Carolina lowered benefit payouts and increased employer premiums


Suspended 20% surcharge on UI premiums


Cut UI premiums for positive rated employers by an average of 30% for any calendar year in which the balance in the Fund equals or exceeds $800 Million


Cut UI premiums for positive rated employers by an average of 38.7% and cut the UI premiums for new employers by 20%


(1) Prior law used an average of the two highest quarter wages.  The law had changed from highest quarter wages to an average of the two highest quarter wages effective October 1, 1983.  Chapter 680 reinstates the pre-1983 law on this issue.  (2) Use of a multiplier of 8⅔ in determining an individual’s total benefit amount.  Prior law used a multiplier of 8.0.  The law had changed from 8⅔ to 8.0 effective October 1, 1983.  Chapter 680 therefore reinstates the pre-1983 law on this issue.


Cut unemployment premiums for positive rated employers by an average of 23%, set a zero rate for employers with credit ratios of 5.0 or over, and reduced from 60% to 50% the percentage of annual average wages used to calculate the taxable wage base.

NC had highest weekly payout in Southeast and the lowest UI premium in the United States at this point


Reduced unemployment taxes in three ways by (1) assigning a one-year zero unemployment insurance tax rate for all positive rated employers, (2) giving overdrawn employers additional time to make contributions to their accounts so that they could qualify for the zero tax rate in 1996, and (3) permanently reducing the tax rate for new employers from 1.8% to 1.2%.


Implemented a zero UI premium for more employers with positive experience ratings, and temporarily reduced the UI premiums by 20% for most employers. Substituted an equivalent contribution to fund enhanced employment services and worker training programs.


Temporarily extended unemployment benefits


Individuals could be disqualified from unemployment benefits for leaving work due to a health condition or the health condition of a family member as long as they gave notice at a reasonable time prior to leaving

Delayed the reinstatement of the 20% UI premium surtax


Reed Bill Fund Authorization; Employment Security Commission Reserve Fund can be used to loan money to the Unemployment Insurance Fund; Interest from Reserve fund will be used for "Worker Training Fund"


Removed disqualifying conditions related to separating from work for family reasons

In 1982 the United States saw its highest nationwide average unemployment rate at 10.8%, and it triggered the entire country to reform their Unemployment Insurance programs.  Forty-four states (including NC) raised their taxable wage bases and amended laws dealing with selected worker groups to comply with new federal standards.  North Carolina raised the Unemployment Insurance premiums businesses paid and reduced benefits.  This solved the problem of double-digit inflation and unemployment and took us into the prosperous 1990s.

In 1993 North Carolina’s State Unemployment Insurance Trust Fund was valued at $1.5 billion (in 2012 dollars, $2.38 billion) and legislation lowered the premium rate to 45th lowest in the nation in efforts to make the state more attractive to businesses.  After the 1995 legislation passed, North Carolina’s premium rate was the lowest in the nation.  The average weekly payout to claimants was the highest in the southeast at $188 (in 2012 dollars, $257.37).  The maximum weekly benefit was also the highest in the southeast at $297.00 (in 2012 dollars, $445.95).

The North Carolina House of Representatives voted last night (Feb 4th) on HB 4, a bill to cut UI payouts in an effort to lower the federal UI debt.  The bill will reduce the maximum weekly benefits from a payout of $535 to $350 and from a maximum of 26 weeks to 20 weeks.  Some have argued $350 a week is too little to live on, yet in 1995 the average weekly allowance was almost $100 less than the maximum is today, adjusted for inflation.  The bill will be voted on again in the House tonight (Feb 5th) and will then be sent to the Senate for debate.

The cuts in the 1990s allowed many businesses to pay 0% UI premiums and increased benefits for the unemployed, yet North Carolina still maintained a positive balance in the trust fund through the 2001 recession.  After the short recession small changes were made during the 2000s to extend benefits and allow more people to qualify without adjusting the business premium rate.  North Carolina was paying more than it was saving, and it eventually caught up when the Great Recession began to take effect.  The last positive balance was in 2008 at $414 million, also the same year the state saw its highest unemployment rate since 1990 at 6.9%.

The financial data expressed in the table below illustrate the effects of UI legislative action in North Carolina since 1990.  With internet-booming economic expansion creating prosperity from coast-to-coast, North Carolina enjoyed a steady decrease in unemployment, which was the main factor in the large surplus in the trust fund throughout the 1990s.  Politicians took this as a cue to increase benefits and move government monies into other areas, over time neglecting the state’s UI trust fund.

Notice the state’s Year End Net Balance column held a positive number until 2009, when North Carolina took a federal loan for the first time since 1990.  While reducing UI premium contribution rates was manageable during the 1990s and collections remained positive, the state was unable to keep pace with paid benefits even during years of job growth in the early 2000s. The data indicates a focus on reevaluating unemployment benefits, rather than altering premium contribution rates, is the pragmatic approach to clearing North Carolina’s growing UI debt to the federal government.  House Bill 4 is a good start to getting North Carolina back to the years of positive Year End Balances in the UI Trust Fund, not zeros.


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Intern Hubert Papes contributed to this newsletter.