Racing through a sweetheart, no-bid contract

Racing through a sweetheart, no-bid contract

- in Weekly Briefing

The legislature’s “solution” to the unemployment insurance fund shortfall

Quick take: In the aftermath of the Great Recession, North Carolina’s unemployment insurance system is deep in red ink. Unfortunately, rather than acknowledging the obvious causes of this problem and working with state experts to implement fairly obvious solutions, GOP lawmakers are seizing on the problem to ram through a bill that would almost certainly give a no-bid contract to a private consultant favored by business lobbyists.

One of the most important and least understood programs in government is unemployment insurance or “UI.” Though UI is a large and complex system that involves both the state and federal governments, the program essentially boils down to this: employers pay taxes on behalf of their workers, funds accumulate in public coffers and are paid out to eligible workers who apply as a fraction of their former wages for a limited period of time when they become unemployed through no fault of their own.

Obviously, there are a thousand devils in the detail (tax rates, eligibility for benefits, who administers the program, the amount of benefits and the duration during which they are paid out, how states cope with spikes in unemployment, etc…) but basically the system is pretty straightforward: lots of people pay a little today so that they’ll have funds to draw on tomorrow if necessary.

The overarching problem afflicting UI systems around the country in 2011 is also pretty straightforward: they’re broke. With the enormous leaps in unemployment brought on by the Great Recession, UI funds around the country have become depleted and accumulated huge deficits.

For the time being, loans from the federal government have plugged the hole. Everyone is agreed, however, that the current situation is unsustainable. Under the current set-up, states like North Carolina are accruing a big debt to the federal government (in the billions of dollars) and confronting big interest payments that will take a long time to pay off. And while the state is in position to make its next loan payment this fall, in the long run, change must occur.

Origins of the problem

In a perfect world (as in so many other areas), officials would avoid situations like the present by accumulating enough funds during the good times to weather the storms that occur when times get tough. This system is frequently described as “forward financing.”

The only problem with this approach, however, is that the people who ultimately make the decisions about how much money is accumulated (i.e. what UI taxes look like) are politicians –most of whom are beholden to business interests that generally want their taxes to be as low as possible. The NC Chamber (formerly NCCBI) even bragged in past years as to the amounts of money its lobbying on UI insurance taxes saved average members.

In North Carolina, this aversion to UI taxes has been one of the principal drivers of the current shortfall. Strange as it seems today, there was a time in the not-too-distant past in which North Carolina’s UI fund had a significant surplus – not nearly as large as the current multi-billion dollar deficit, but on the order of several hundred million dollars. In 2001, the John Locke Foundation was still railing that the fund was “massively overfunded.”

Unfortunately, lawmakers of both parties found the lure of such a fund as a vehicle for providing tax cuts to businesses irresistible. A recent report from the N.C. Budget and Tax Center catalogs 11 different UI tax cuts that occurred throughout the 1990’s under leaders of both parties (see page 2) and that brought the tax rate to 0.0% for a large number of employers.

The report summarized the situation this way:

“In the mid1990s, North Carolina’s policymakers enacted a series of tax changes that moved the state effectively to payasyougo financing. These changes brought the state’s unemployment insurance trust fund levels below safe levels prescribed by the best evidence—just before the first recession of the 2000s hit….

Indeed, the balance of the UI trust fund fell precipitously in the 1990s, leaving the state’s unemployment insurance system illprepared for the current recession.

If North Carolina had required contributions from employers at the national average tax rate from 1990 to 2004, the UI Trust Fund would have had $2.8 billion in 2004, potentially erasing the current solvency issues. (Emphasis supplied).

So, what to do?

Though obviously replete with details, the gist of what needs to occur in order to resuscitate and revive the state UI Trust Fund is pretty clear: policymakers will need to reduce the debt and pump more money into the fund. There are two obvious potential sources: the federal government and state level taxes.

On the federal front, there is some cause for optimism. The Obama administration has proposed the idea of deferring interest on federal loans for two more years and proposals in the Senate would offer substantial loan forgiveness. These ideas certainly bear watching and deserve strong support from state officials – especially since they favor states like North Carolina that have already adopted a number of progressive solutions in the administration of benefits.

Closer to home, however, lawmakers will have to reverse at least some of the huge tax cuts of the 1990’s at some point in the future. State officials at the Employment Security Commission or “ESC” (the agency that oversees UI) have been presenting the hard facts in this regard to lawmakers for years.

Unfortunately, such hard realities has never been received with particular warmth by lawmakers – especially during the last decade (a period that featured two painful recessions and in which higher taxes on businesses were rejected as harmful to the economy).

A new wrong turn

This legislative session, after years of denial, pro-business conservatives are finally acknowledging that something must be done about UI. Unfortunately, rather than tackling things head on, these lawmakers appear bent on using the UI funding crisis as a means of advancing an ideological agenda that will in all likelihood target workers.

Since the outset of the session, conservative business interests have been pushing a proposal to shift the currently independent ESC under the control of the Department of Commerce – the state’s business recruitment agency that is not designed or equipped to run a large social insurance agency.

More recently, in a move supported by business lobbyists, a bill was rammed through the Senate in less than 48 hours from introduction to passage that calls upon the Department of Commerce to rapidly enter into a no-bid, $250,000 contract with an outside consultant to study the state’s UI system. As originally introduced, the bill would have even allowed the study to be paid for by private business interests.

By all indications, including the words of the bill sponsor, Senator Bob Rucho of Mecklenburg, the plan is to turn the matter over to the Lucas Group – a Boston-based, self-described “boutique corporate strategy consulting firm” that has conducted a UI study in South Carolina. This morning, Rucho told the House Finance Committee that it was urgent that the bill be passed without even a week’s delay so that such a study could be undertaken as soon as possible.

When pressed, however, by Democratic committee members as to why some combination of economists from the General Assembly’s Fiscal Research Division, the ESC itself and in-state universities couldn’t handle the assignment, all Rucho could say was that it was important to get a “fresh” take from outside “experts.”

Going forward

This afternoon, in keeping with the amazingly (and even suspiciously) rapid progress of the legislation, the House added the measure to its calendar at the last minute and pushed it through to final passage just four hours after it was first considered in the House Finance committee. The bill now heads to the Senate for final consideration and could be on the Governor’s desk very shortly.

Let’s hope she gives the matter full and thorough consideration before rushing into approving a no-bid, industry-directed study in this critical area.

About the author

Rob Schofield, Director of NC Policy Watch, has three decades of experience as a lawyer, lobbyist, writer and commentator. At Policy Watch, Rob writes and edits daily online commentaries and handles numerous public speaking and electronic media appearances. He also delivers a radio commentary that’s broadcast weekdays on WRAL-FM and WCHL and hosts News and Views, a weekly radio news magazine that airs on multiple stations across North Carolina.
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