States that have borrowed from the federal government to cover unemployment checks are on the verge of owing interest
WASHINGTON – Ten states that have struggled to pay the rising costs of rising unemployment compensation claims during the COVID-19 pandemic will face another challenge starting Monday: accrued interest on federal loans they relied on to cover payments to the unemployed.
Collectively, these states – which include Colorado, Minnesota, New Jersey and Pennsylvania – owe the federal government more than $ 52 billion, according to US Treasury data.
Until now, loans to the state unemployment compensation trust funds have been interest-free, but from September 6, an interest rate of 2.3% will apply to the remaining amounts.
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With additional interest charges looming, officials in Nevada and Ohio repaid what those states owed just days before interest began to accrue, not only avoiding additional interest charges, but also higher costs for companies in these states.
“By repaying this loan in full, we are ensuring that Ohio businesses do not see an increase in their federal payroll taxes,” Ohio Gov. Mike DeWine said in a press release Wednesday announcing a payment to the government. US Treasury of nearly $ 1.5 billion. “Without this additional tax burden, our employers can invest more money in their businesses and hire more people.”
Both Ohio and Nevada used federal bailout dollars to repay their loans, known as Title XII advances.
“Paying off the loan puts Nevada in a good position,” said Heidi Saucedo, spokesperson for the Nevada job security division. “We can start building our trust fund to prepare for the future while keeping rates manageable for employers. “
Unemployment trust funds strained by pandemic
Interest payments on these federal loans come into play at the same time that additional unemployment benefits paid by the federal government are also coming to an end in many states, including Colorado.
These benefits included a weekly supplement of $ 300 on top of state-paid benefits, as well as weeks of additional payments for the long-term unemployed and an assistance program for concert workers who are generally not entitled to benefits. unemployment. Some Republican-controlled states ended these additional payments before the September deadline.
But as the federal government supplemented traditional unemployment assistance, the scale of the pandemic-induced unemployment lists strained some states where unemployment trust funds could not meet sudden demand from residents. dismissed.
In 2020, 22 states borrowed from the federal government to keep these unemployment checks in circulation, according to the US Department of Labor.
This included some states like Minnesota, which had to borrow even though its trust fund was in a strong position before last year’s economic crisis.
Before the pandemic, the Minnesota trust fund had 94% of the amount deemed necessary to cover a year of benefits, according to Minnesota Reformer report. But those reserves were depleted in the first six months of the pandemic, according to the Federal Reserve Bank of Minneapolis.
Minnesota did not use its federal stimulus funds to help pay off a $ 1.1 billion federal loan. Instead, payroll taxes are expected to rise significantly next year.
Asked about the state’s plans to repay the loan, a spokeswoman for the Minnesota Department of Employment and Economic Development said it could take several years, and said Congress “should do more to reduce the burden on employers “to fill these trust funds.
“At a bare minimum, the waiver of interest should continue,” DEED spokeswoman Jen Gates said. “Beyond that, Congress should seriously consider forgiving all or most of the amount borrowed; especially for states like Minnesota, whose trust funds were solvent before the start of the pandemic. “
Using federal aid to pay down debt, replenish trust funds
The United States Chamber of Commerce and the National Association of State Workforce Agencies have called on Congress to waive interest payments on federal loans. But lawmakers on Capitol Hill took no action before that interest-free period expired on Monday.
But unlike after the Great Recession, when a number of states also had to borrow to cover unemployment benefits, the stimulus dollars passed this year could help many states get out of this financial hole.
New Mexico, which owed $ 206 million in early 2021, used federal stimulus dollars earlier this summer not only to repay its federal loan, but also to fully restore its unemployment compensation trust fund to the $ 460 million available before the pandemic.
Federal officials have explicitly encouraged states to use federal stimulus dollars for both uses, creating a potential “take-back” for their unemployment benefit reserves.
“The federal government is giving states a mulligan they’ve never had before,” said Jared Walczak of the Tax Foundation, a Washington-based conservative nonprofit focused on tax policy.
He added that for states replenishing their UC trust funds with federal stimulus dollars, “it will be almost as if, for the purposes of the trust fund, the pandemic never happened, only the benefits. never went out “.
STATES WITH FEDERAL UNEMPLOYMENT COMPENSATION LOANS
- California: $ 19.5 billion
- Colorado: $ 1 billion
- Connecticut: $ 725 million
- Illinois: $ 4.2 billion
- Massachusetts: $ 2.3 billion
- Minnesota: $ 1.1 billion
- New Jersey: $ 185 million
- New York: $ 9 billion
- Ohio*: $ 1.5 billion
- Pennsylvania: $ 721 million
- Texas: $ 6.9 billion
Source: US Treasury data as of September 2
* Ohio officials said the final payment moved to the Treasury this week, but the balance was still listed on Friday.