January 3, 2012

Click here to view and here to listen to Fergus Hodgson discussing this Spotlight report.

RALEIGH — North Carolina could reverse its unemployment insurance deficit and repay its $2.6 billion trust fund debt by aligning its benefits and eligibility period more closely to those in neighboring states. Those changes would also limit future tax increases, according to a John Locke Foundation Spotlight report scheduled for release next week.

“While the trust fund debt has grown rapidly in just two-and-a-half years, changes of relative ease would pay off this debt in six years,” said report author Fergus Hodgson, JLF Director of Fiscal Policy Studies. “Doing so would halt the growing imposition of debt on future workers not yet able to defend themselves in the political process, and it would avert further intrusion and mandatory tax increases from the federal government.”

The General Assembly’s Revenue Laws Study Committee subpoenaed testimony on the unemployment debt this morning from the head of the N.C. Division of Employment Security.

Hodgson’s report recommends adjusting the state’s payment formula to align with South Carolina’s current benefits. That would cut the average weekly unemployment benefit from $292 to $239. Hodgson also recommends cutting the number of exclusively state-funded weeks of unemployment benefits from 26 to 20.

The state owes the $2.6 billion to the federal government. North Carolina started borrowing money from the feds during the Great Recession after draining the state’s unemployment insurance trust fund.

“Rather than scale back benefits or tighten eligibility standards, North Carolina and many other states chose to borrow from the federal government to make up their trust fund shortfalls,” Hodgson said. “In 2009 alone, North Carolina’s unemployment insurance administrators paid out $1.8 billion in excess of available tax revenues.”

While 27 states have piled up debts to the federal government, North Carolina has dug a particularly deep hole, Hodgson said. “At $272 per person, North Carolina’s debt is higher than all of the state’s neighbors and third highest among all 27 states with this type of debt,” he said. “North Carolina is the only Southeastern state in the top 10 for per capita unemployment insurance debt.”

The state debt continues to grow at an annual rate of $178 million, and the feds levied their first interest charge of $78 million in September, Hodgson said.

Starting this month, the federal government also tacked on a new 0.3 percent tax on wage income to force North Carolina to start repaying its debt. Additional 0.3 percent rate increases will take effect every year until repayment begins.

“Higher taxes now force current workers to pay for the government’s past fiscal irresponsibility,” Hodgson said. “There’s no good reason to raise taxes over and above the federal requirement.”

North Carolina has plenty of room to tackle the debt by adjusting its policies, Hodgson said. “The state’s $292 average weekly benefit is more than that of all four bordering states,” he said. “It’s 22 percent higher than South Carolina’s average benefit, and 25 percent higher than the benefit in Tennessee. North Carolina’s average benefit also greatly exceeds the $230 generated each week after taxes from a full-time minimum-wage job.”

Aligning North Carolina’s benefit generosity with South Carolina’s would save this state $250 million a year, Hodgson said. “Even a less aggressive approach of reducing North Carolina’s benefit to $258 a week — the average in neighboring states — would save $160 million.”

The average length of unemployment benefits has increased by 25 percent in North Carolina between 2007 and 2011, Hodgson said. “At more than 17 weeks, the current average is longer than the maximum eligibility period spelled out in the original legislation that created unemployment benefits.”

Hodgson recommends that North Carolina follow the lead of South Carolina and Missouri in scaling back the weeks of exclusively state-funded unemployment eligibility from 26 to 20. “That would save between $230 million and $440 million annually in North Carolina,” he said. “This step alone would balance the trust fund shortfall and halt further federally mandated tax increases.”

Legislators should reject any North Carolina participation in or funding of a program to extend benefits from the 80th through 99th weeks of unemployment, Hodgson said. “Full federal funding of these extended benefits runs out March 6, and North Carolina would have to find another $212 million a year just to pay half of this program’s costs.”

Even with recommended eligibility changes, unemployed workers could collect benefits for up to 73 weeks, or 18 months, Hodgson said.

Together, the federal tax penalty, a South Carolina-style benefit level, and a scaled-back eligibility period would pay off the debt by the end of 2017, Hodgson said.

In addition to benefit levels and eligibility periods, lawmakers could target inaccuracy that leads to unemployment overpayments, Hodgson said. The U.S. Labor Department estimates North Carolina makes 8.9 percent of its unemployment payments in error, about $125 million annually. “One idea involves charging interest on benefit repayments where fraud has been found.”

Lawmakers should be cautious as they pursue reforms, Hodgson said. “Legislators should avoid changes that further complicate and entrench unemployment insurance as a compulsory program with no room for either cost-saving innovations or pathways toward private, voluntary insurance options,” he said. “For now, the best plan simply requires putting North Carolina’s unemployment eligibility and benefits in line with those of her southern neighbor.”

Fergus Hodgson’s Spotlight report, “First, Stop the Bleeding: Getting North Carolina Out of Its Unemployment Insurance Crisis,” is available at the JLF website. For more information, please contact Hodgson at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].