Thursday, January 28, 2010

A Perfect Storm

State unemployment program bankrupt amid record jobless rate

By Todd Morehead

An economic hurricane has finally made landfall over South Carolina and state legislators seemingly didn’t have the foresight to pack an umbrella. It was widely reported last week that the jobless rate in S.C. has hit a record 12.6 percent, well above the 10 percent national average. At a time when scores of out-of-work South Carolinians are looking to the state for unemployment benefits, many taxpayers may not realize that the Employment Security Commission’s unemployment insurance reserves ran dry over a year ago and the state government is relying on federal loans to keep the program afloat.

South Carolina, a state that made national headlines for attempting to reject federal stimulus dollars, has already borrowed over $723 million from the federal government since December 2008 to cover the unemployment insurance shortfall in order to keep paying out benefits.

Following a federal law passed during the Great Depression, each state may set its own unemployment insurance policies and set parameters for funding those policies within broad federal guidelines. The programs were designed for states to pad their reserves during times of economic stability, so that unemployment insurance could aid unemployed workers and continue to stimulate the economy during downturns –in short, to keep consumers spending and businesses open long enough to weather the storm. Over the years, however, enough state legislators nationwide vowed to increase benefits while lowering taxes, and effectively chipped their unemployment systems into the red. Currently 17 out of 50 state unemployment insurance programs have gone bankrupt and are forced to borrow money from the federal government in the middle of the worst recession since the Depression that gave birth to the programs.

South Carolina was among the first eight states to show a declining trust fund balance starting around 2005. The fund had close to $800 million in reserves in 2000, but massive tax cuts kept incoming revenue from sustaining it.

So far, the federal loans have kept the state unemployment insurance program from going belly up, but an unfortunate side effect is that the loans pass along costs to federal taxpayers, many of whom live in states that properly funded their unemployment programs. South Carolina taxpayers, in the long term, will cover tens of millions in interest charges on the federal loans, which likely will have to be paid out of the state’s general budget.

South Carolina has responded with short term planning, so far only restructuring the parameters of benefits payouts to the unemployed. Recently the House almost unanimously approved a temporary measure that will make it harder for workers who were fired for legitimate reasons –such as insubordination, sleeping on the job, intentionally damaging property, and other reasons—from collecting benefits. The measure moved to the Senate last week.

A number of other measures on the legislative agenda include a bill to require mandatory drug screenings for persons receiving unemployment; redefining the words “unemployed” and “wages” to tweak S.C. Employment Security Law and to increase the taxable wage base, respectively; and to allow a state tax credit for employers hiring an unemployed individual receiving unemployment benefits.

House representatives also plan to enact the “Employment Security Funding and Reform Act,” which is currently still in committee (House Ways and Means).

While state legislators hammer out ways to plug the leak, it could be years before South Carolina taxpayers are out of the water.

Special thanks to Olga Pierce and the Pro Publica journalism project for compiling a portion of the data used for this story.

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