In this space last Sunday, I wrote about Erskine Bowles’ plea for the nation to stop spending $1 trillion a year more than it takes in. Unless we fix that quickly, Bowles argued, “America is well on its way to becoming a second-rate power.”
Now let’s look closer to home. North Carolina has its own fiscal crisis, even though our constitution requires a balanced state budget. This crisis is a bit under the radar still, but at stake is the state’s financial stability, the level of taxes companies pay and the livelihoods of the tens of thousands of North Carolinians laid off through no fault of their own.
North Carolina’s unemployment insurance system is broke, and broken. The state owes the federal government $2.4 billion, money it borrowed to pay benefits to laid off workers during the downturn. On top of that, the state is racking up close to $500 million a year in new debt by paying out more in benefits than it takes in from unemployment taxes.
Those are big numbers for a state our size. North Carolina’s debt to the federal government is the nation’s largest after California, New York and Pennsylvania. The current system, like Social Security and Medicare, is unsustainable. And like Social Security and Medicare, you can’t fix it without someone paying more or getting less.
We didn’t save for rainy day
How did we get here? Primarily through cutting unemployment tax rates on employers throughout the good times of the 1990s, then running into two recessions – in the early 2000s and the Great Recession that began in December 2007. That took the unemployment trust fund from a surplus of well over $1 billion to $2.6 billion in the red.
There are other problems. Some unemployed workers who shouldn’t qualify get benefits anyway because the employer didn’t file a timely response to the worker’s application. Some people turn down jobs or don’t look hard for them because they are getting by on their benefits. Some people receiving benefits keep getting them even after they find a job. One federal study, using a statistical sample, extrapolated that North Carolina paid more than $500 million in benefits from 2008 to 2011 that should not have been paid.
Some ways to fix it
Every solution has problems.
Cutting benefits puts the burden on those least able to afford it.
Raising taxes on employers hikes costs on the very people who can create the jobs needed to get people off unemployment.
Here are some steps the state should take, some it shouldn’t and others it should consider:
• About 19,000 N.C. businesses pay zero in unemployment taxes. That should end. Every business has the potential to impose costs on the system, and laid-off workers’ spending helps the whole economy.
• New businesses pay a rate of just 1.2 percent. Within a few years, their rate more than doubles, to 2.7 percent. That sounds like a credit-card or mortgage offer that starts with an irresistibly low introductory rate before ballooning. End that unwelcome surprise by starting everyone at 2.5 percent or so.
• The state should lobby the feds to forgive part of our debt, waive interest on it or let us pay it back over a longer period.
• Wages subject to taxation should grow with inflation.
• Rates could rise incrementally across the board, with credits for those who hire.
• The state should be more vigilant about paying benefits only to those who qualify, and better police fraud by both employers and employees.
• Drastic benefit cuts are not the answer. North Carolina’s maximum weekly benefit is the highest in the Southeast and could be trimmed. But the 26 weeks it offers is comparable to many states, and its average weekly benefit check of $298 is only a little higher than surrounding states. Cuts that balance the books would be so large as to harm the program’s mission: providing a safety net for those laid off. In any case, federal rules block cutting benefits until we’ve paid off our debt.
Whatever the approach, the legislature needs to get on it. Every dollar added to this debt could hit the taxpayer, or be diverted from better uses.
