$28M due to feds may force special session

By Kevin Wheatley Published:

Gov. Steve Beshear will call a special session to handle a looming $28 million interest payment on a federal loan for unemployment benefits if no other options are available, his spokeswoman says.

The outlook for business owners in Frankfort and statewide is bleak if Kentucky misses the Sept. 30 deadline, several say, and they’re waiting to see what happens. At stake is roughly $600 million in federal tax credits they could lose. 

Annual federal unemployment taxes would increase from $56 to $434 per employee without the credit, on top of other rising expenses, if the state doesn’t pay up or gets a deadline extension on the $28 million interest payment.

“There is clearly a concern among the business community about this issue,” Bryan Sunderland, vice president of public affairs with the Kentucky Chamber of Commerce, told The State Journal.

“The good news, if you can call it that at this point … is that no matter who we talk to in the legislature – Democrat, Republican, House, Senate or the administration – no one wants to see this happen.”

Since the recession wiped out the state’s

Unemployment Insurance Trust Fund in January 2009, Kentucky has borrowed about $950 million from the federal government to maintain its unemployment insurance program.

Laid off workers receive a percentage of their salaries for 26 weeks in the state program, which businesses pay into.

Last year, the General Assembly approved a plan brokered by a task force of state business and labor leaders that will both reduce unemployment benefits and increase the burden on businesses to rebuild the state unemployment trust fund’s financial stability and pay off the $950 million federal loan.

But lawmakers, thinking the feds would defer payments, didn’t decide how the state would pay the loan’s interest.

Now, the bill is coming due.

Kerri Richardson, Beshear’s spokeswoman, said the administration is working with officials in Washington on short-term solutions to the interest payment. 

The federal government could either extend the payment deadline, as happened last year, or forgive the interest debt.

Other states – a total of 30 got federal help on unemployment insurance during the recession – have made similar requests.

“Together we intend to pursue all options available, both at the federal and state levels, to address the immediate issue of the interest payment due at the end of September,” Richardson said in an email last week. 

“The administration is continuing ongoing discussions with federal agencies. 

“Because a longer term solution to the interest issue will need to be addressed in the 2012 session, a special session of the General Assembly to address the immediate issue would be necessary only if no other options are available.”

Beshear would need legislative approval before tapping into $121 million recently deposited in the state’s surplus account to make the $28 million interest payment. 

The state’s Education and Workforce Development Cabinet has about $9 million available in an interest and penalties account, according to cabinet spokeswoman Cathy Johnson. 

The state would then have to come up with $19 million to make up the difference.

Sunderland says the Chamber has been in close contact with state and federal officials on the issue as the Sept. 30 deadline approaches.

“They’re looking at some additional state options that may give them some flexibility in making sure we get this solved by Sept. 30,” Sunderland said, noting Beshear during a recent radio interview didn’t rule out a special session as “a last resort” to paying the loan’s interest.

Political leaders have assured the Chamber that the state will settle the issue before Sept. 30, Sunderland says.

Local lawmakers have different views on whether Beshear should call a special session, which costs taxpayers about $60,000 per day.

Rep. Derrick Graham says he hopes Beshear can work out an agreement with the federal government without calling legislators to Frankfort next month.

“I would hope that it could be resolved without us having to go to a special session, but I think the administration has to take the lead on what direction it takes,” Graham told The State Journal.

But Sen. Julian Carroll says Beshear should call a special session and handle the $28 million payment sooner rather than later.

“It appears we’re going to have to make the payment of the interest,” Carroll said, noting Beshear would need the legislature’s approval to use surplus funds for the payment. 

“… Fortunately we’ve got the money to make the payment. And certainly we don’t want our businesses to have to suffer by a failure to make the payment.”

Local small businesses, which make up 94 percent of the Frankfort Area Chamber of Commerce’s membership, would be especially hit, Executive Director Carmen Inman says.

Some small business owners reached by The State Journal declined to comment on the issue, mostly because they hadn’t laid off many employees and hadn’t contributed to the drain on the state’s unemployment insurance fund. Others didn’t return messages seeking comment.

But paying almost eightfold per employee in federal taxes would lead to thousands in additional costs for almost any businesses.

“It’s an incredible cost increase percentage wise,” said Jonathan Vaught, president of McAllen Solutions.

“… It’s going to drive up business costs. That’s the bottom line. Most small companies do all they can to retain their employees, so when something like this comes along, it’s kind of like a slap in the face to small business.”

Businesses statewide would be taxed $434 in federal unemployment for each employee on their payrolls if the state misses the payment. With the current $600 million credit, the rate is $56 per employee.

That means for 10 employees, businesses would pay $4,340 in unemployment taxes, up from $560; for 25, businesses would pay $10,850, up from $1,400; and for 50, businesses would pay $21,700, up from $2,800. 

Those increased costs could further stymie a fragile economy.

“Any additional increases in unemployment insurance costs will have detrimental effects on small business,” said Charles Booe, owner of Rebecca Ruth Candy, Inc. 

With other business expenses climbing, a sudden tax increase could also keep companies from adding new employees to the tax rolls and drive up prices, Booe and Vaught say.

“Any additional cost will make me as a small business owner rethink hiring any additional personnel,” Booe said.

 

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