Understanding McCrory’s destructive unemployment insurance system “fix”
State political leaders held a self-congratulatory press conference on Tuesday at which they took credit for the earlier-than-scheduled payoff of North Carolina’s unemployment insurance debt to the federal government. According to Governor Pat McCrory, Senate President Pro Tem Phil Berger and House Speaker Tim Moore, conservative “reforms” have made it possible for the state to “fix a broken system.”
This is from McCrory’s official statement:
“Getting more North Carolinians jobs and fixing our broken unemployment system was a top priority when I entered office. Thanks to quick action and tough decisions, North Carolina’s unemployment system is more efficient, more customer friendly and the time needed to settle appeals has been dramatically reduced. These steps, along with paying off this debt, are helping get more people back to work.”
McCrory and legislative leaders went on to claim that the “tough decisions” made in the 2013 law, which imposed some of the biggest cuts to unemployment insurance benefits and eligibility in modern U.S. history, somehow helped the economy rebound and get “North Carolinians back to work.”
All in all, it was a moment of apparent political triumph for conservative leaders.
It was also moment in which the facts were wildly distorted.
What really happened
There are a lot of ways to characterize what’s actually happened to North Carolina’s unemployment insurance (UI) system and the state economy that it’s supposed to undergird in recent years. Here’s one potentially helpful analogy:
Imagine that you have recently inherited a small apartment building from, say, your uncle. The place is mostly full and in “okay” shape but nothing to write home about. It’s also in a financial mess because a) your uncle kept the rents artificially low (the tenants were mostly buddies of his and yours) and b) he was trying to squeeze out as much income as possible in his declining years. Some recent unplanned, storm-related expenses from a major hurricane have also saddled the building with some big debts. Upkeep is starting to suffer and some tenants are starting to leave.
Now, the building is yours. What to do to make it solvent?
This is the situation that Republicans “inherited” in 2013. The North Carolina UI system was a middle-of-the-pack program that provided middle-of-the-pack benefits to workers and middle-of-the-pack stimulation to the economy when times were tough. Unfortunately, it was also a system that suffered from years of financial neglect because conservative, business-friendly Democrats had worked with Republicans to keep UI taxes on their friends in the state employer community low (the rate was 0.0% for many when times were good).
As a result, the state trust fund that was supposed to pay worker benefits when the economy tanked was quickly swamped when the “hurricane” of the Great Recession hit. North Carolina was forced to run up a big debt with the federal government in order to keep things afloat.
Enter the state’s Republican leadership in 2013 as the new “landlords” of this system. Their “solution” to the problem of an old and struggling “building” with inadequate revenue and a big debt: A massive reduction in upkeep and services.
In keeping with the time-honored practice of slumlords everywhere, the GOP slashed the amount and duration of UI benefits and dramatically reduced eligibility. In other words, they closed the pool, stopped updating rugs, painting and fixtures, let the landscaping go to seed and allowed the parking lot to crumble. The money saved was then applied (along with a brief and modest temporary “rent” increase) to pay off the “storm” debt.
Where things stand now
The results of the slumlord approach to government have not been surprising. Like a neglected apartment building that has fallen into disrepair and is no longer nearly as good at doing what it was designed to do (providing homes for people) North Carolina’s unemployment insurance system is now similarly challenged.
The amount and duration of the benefits that are provided to those who lose their jobs through no fault of their own is now near the bottom in the nation. Similarly, the amount of money that the system pumps into communities and businesses that are hit hard by layoffs is also greatly reduced. Yes, the debt to the federal government has been repaid, but only at the cost of hollowing out what was already a fragile and threadbare program. Now, like the crumbling apartment building, the system is stable for the time being. Like a house of cards, however, it is ill-equipped to weather the next storm.
Yesterday, analysts at the North Carolina Budget and Tax Center released a special report in which they examined the condition of the state’s UI system and the financial realities surrounding the federal debt payoff. According to the report, the reduction in the number of people receiving unemployment insurance and the cuts to benefit levels have significantly hindered the ability of the system to do its job – namely to support the economy in a downturn.
The authors found that the average weekly benefit amount as a share of the average weekly employed wage has dropped dramatically since the 2013 cuts. Whereas worker benefits averaged an already inadequate 39 percent of employed wages the previous two decades, in 2014 it fell to a truly dreadful 27 percent.
Because jobless workers don’t receive enough money to support their families, the report notes, they stop spending or turn to other public benefits to make sure they can put food on the table or provide shelter for their families. This, in turn, further damages the economy.
In other words, the UI system is no more “fixed” than a crumbling, high-vacancy apartment building that still manages to stay in the black.
Add to this the fact that the surrounding neighborhood (i.e. the state’s economy) remains fragile and spotty (a lower percentage of North Carolinians is working now than before the Great Recession and wages remain depressed in numerous areas) and the Governor’s claim that the UI changes have spurred some kind of economic magic becomes even more preposterous. It’s as if a notorious slumlord was claiming responsibility for his or her city’s growth and prosperity.
Fortunately, notwithstanding all the efforts to claim credit regarding the early debt payoff, there are still opportunities to shore up and improve the state UI system. With some relatively modest adjustments to employer taxes, state leaders could, at least, avoid repeating the errors of the past by growing the UI Trust Fund to the point at which it could withstand a future recession without resorting to more borrowing or benefit cuts. With just a smidgen of creativity, they could even restore some of the massive benefit cuts that have sent us to the bottom of national rankings.
As it stands now, however, UI taxes for the state’s employers are scheduled to fall yet again – thus further eroding the long-term viability of the system. Like an increasingly decrepit apartment building, North Carolina’s UI system stands on the precipice of declining to the point at which there will be little left to save.
Let’s hope state leaders own up to their duty to maintain and revive this critically important parcel of public property before it’s too late.