Fixing a System that Is Broke and Broken

North Carolina currently faces a more than $2 billion debt to the federal government for loans used to fund the state’s share of unemployment compensation benefits — this is the third largest unemployment insurance debt in the United States.

Record-high unemployment rates, a very slow economic recovery and extended benefits mandated by the federal government led to a significant increase in claims that quickly depleted the state’s unemployment trust fund.When the trust fund was solvent in good economic times, there was a reduction in UI taxes, while at the same time benefits were being expanded. The combination of these factors resulted in an unsustainable system that was ultimately not prepared for the severity of the recession.

Neither the tax rates nor the benefit structure single-handedly led to the debt crisis and, similarly, fixing just one of these factors is not a viable solution to creating a solvent and effective UI system for the future. Our state’s UI system has an annual deficit of $470 million a year. The benefit payout has simply outstripped the ability to pay for the program and inaction for many years caused the problem to quickly go from bad to worse. A number of measures have to be considered in order to bring balance to the system. North Carolina’s UI benefits paid are more generous than the national average and above the regional area.

North Carolina’s unemployment insurance system is not only broke but also broken. The broken UI system has leaked $556 million in improper jobless benefits payouts between 2008 and 2011, of which millions involved allegations of fraud. An investigation uncovered serious problems that contribute to UI fraud going back 15 years.

It gets worse. According to the U.S. Department of Labor, North Carolina had the worst scores in the country on important quality-control measures. In fact, of 120 quality checks performed by the department on our state’s unemployment agency since 1997, it has passed only twice.

The responsibility to pay off this debt falls squarely on employers. Under current federal guidelines, and given the state’s outstanding loan balance, North Carolina employers will repay approximately $2.5 billion in principal and more than $500 million in interest from 2011 to 2019 to extinguish the state’s loan.

On Nov. 10, 2012, North Carolina missed another deadline to repay the federal UI loan in order to avoid additional tax penalties. This translates into a tax increase on every job from $63 to $84 per employee, and will continue to rise annually until the debt is paid. These crippling tax increases at the federal and state levels year-after-year will cost North Carolina jobs, making our unemployment problem worse. Inaction on this issue cost employers a total of $395 million in 2012 alone.

While tax adjustments are an appropriate part of a comprehensive solution, it would be irresponsible not to address the problem as a whole, which includes ensuring that employer investments into the fund are managed efficiently and inserting accountability measures into the system.

It is important that we make common-sense reforms to align tax revenues with benefits and allow North Carolina to be competitive with other states which helps attract business and investment. The goal is that no one will ever reach the end of their benefits. A job is the ultimate economic stimulus and changes to affordability would be consistent with the goal of an enhanced focus on reemployment of UI claimants.

The Fayetteville Regional Chamber has joined a Reemployment Coalition of businesses, local chambers and allied business organizations to address the state’s broken UI system and advocate for reforms that put the focus back on jobs.

Photo: Record-high unemployment rates, a very slow economic recovery and extended benefits mandates by the federal government led to a significant increase in claims that quickly depleted the state’s unemployment trust fund.