Washington Watch
December 2008
States’ Funds for Jobless Are Drying Up
States’ funds for the jobless are drying up, according to an article by Jennifer Steinhauer of the New York Times.
With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments.
Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months (including Arkansas), according to the National Association of State Workforce Agencies. Funds in two states, Indiana and Michigan, have already dried up, and both states are borrowing from the federal government to make payments to the unemployed.
Unemployment taxes are collected by states from employers, but the rate varies from state to state per employee. In good times, states build up trust funds so that when unemployment is high there is enough money to cover the requests for benefits, which are guaranteed by the federal government.
“You don’t expect the loans to happen this early in a jobs slump,” said Andrew Stettner, the deputy director of the National Employment Law Project, an advocacy organization for low-wage workers. “You would expect that the states should, even when they are not well prepared, to have savings.”
The Labor Department said last week that initial applications for jobless benefits rose to 573,000, the highest reading since November 1982. It is recommended that states keep at least one year of peak-level benefits in their trusts, but many have not, and already some states are far worse off than others.
Indiana’s unemployment trust fund went insolvent last month, and has borrowed twice from Washington since then — the first such loans to the state since 1983. It also expects to request an additional $330 million early next year.
Michigan, which has been borrowing money from the federal government for the past few years to replenish its fund, is now $508.8 million in the hole and unable to repay it. Next month the state, where the unemployment rate is more than 9 percent, will begin levying a special “solvency tax” against some employers to replenish its trust fund.
California, New York, Ohio, Rhode Island and other states are inching toward insolvency as well, and may have to borrow from the federal government to get through at least the first quarter of 2009.
In South Carolina, officials recently requested a $15 million line of credit.
“Right now we have $40 million in our trust fund, and we are paying out around $11 million a week,” said Allen Larson, deputy executive director for the unemployment insurance program at the South Carolina Employment Security Commission. “So we think it is going to be very close as to whether or not we can get through this year. We have never experienced anything like this.”
Officials in New York said the state’s trust fund has about $314 million, compared with $595 million last year, and will most likely have to borrow from the federal government in January.
The situation puts states, many of them facing huge deficits, in an even tighter vise. As more people lose their jobs, the revenue base that the benefits are drawn from shrinks, making it harder to pay claims. Adding to that burden is that states will eventually have to pay back what they borrow.
Some states are worried about next year because the lion’s share of unemployment taxes are collected early in each year, and they are not sure the money will stretch through the end of the next year. The maximum amount of income the federal government can tax employers for each worker is $7,000. (The amount ranges from about $7,000 to about $25,000 for state taxes.)
“It is something that we are concerned about,” said Kim Brannock, a spokeswoman for the Office of Employment and Training in Kentucky, where the unemployment trust fund balance now sits at $133 million, compared with $250 million a year ago. The fund has not borrowed money from the federal government since the 1980s. “At this point we are solvent,” she said, “but we are monitoring the situation.”
States that come up short have the option of borrowing from the federal government, but if the loan is not paid back within the federal fiscal year, 4.7 percent interest is accrued, which cuts into states’ general funds.
“With longer term solvency issues due to the sharp increase in unemployment, federal borrowing quickly becomes expensive,” said Loree Levy, a spokeswoman for the Employment Development Department in California, which is already facing a multi-billion dollar budget gap. “We are anticipating interest payments of $20 million in 2009-10 and if nothing is done to revise the revenue generation model the interest would be $150 million in 2010-11.”
As such, they are then forced to raise taxes or cut services, or both.
Robert Vincent, a spokesman for the Gtech Corporation, a technology company for the lottery industry based in Rhode Island, said, “Unemployment taxes are one of a number of taxes that make it difficult to do business here.”
In many cases, states that have kept unemployment tax rates artificially low — or in some instances decreased them — find themselves in the worst pickle now. Indiana legislators, for example, reduced the tax rates to businesses by 25 percent in 2001.
“So, frankly, they created the perfect storm,” said John Ruckelshaus, the deputy commissioner for the Indiana Department of Workforce Development. “The Legislature will have to go in and look at the whole unemployment trust find first thing when they begin their session.”
At the same time payments have gone up in some states.
To recalibrate the balance, several states are raising taxes on businesses — often through an automatic increase that is triggered when fund levels are endangered — to keep the unemployment checks flowing. An example is the Michigan solvency tax, which will be levied against employers whose workers have received more in benefits than the companies have contributed in unemployment insurance taxes, to the tune of $67.50 per employee.
In Rhode Island, where the unemployment rate is 9.3 percent, the taxable wage base will go to $18,000 from $14,000 in 2009, the highest rate in a decade.
“There is a possibility that we might be slightly under the funds we need come the end of the first quarter,” said Raymond Filippone, the assistant director of income support at the Rhode Island Department of Labor and Training. The state has not borrowed from the federal government since 1980, he said.
“Many states have not raised that tax in years,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington. “Some states have automatic triggers. But then of course you have businesses saying, ‘Whoa, you are raising taxes on me when we are having a tough time and it is a recession, too.’ ”
Still, some said they were thinking beyond the dollars.
“In these times of financial stress every extra cost is a concern,” said Linda Shelton, the spokeswoman for Lifespan, a large health care system in Rhode Island. “However there are many things that worry us even more. We are much more concerned about Rhode Island’s budget crisis, about rising unemployment, the rising number of uninsured and the continuing cuts to health care.”
Fed Slashes Rates to Lowest Level Ever
Media coverage of the Federal Reserve's latest round of rate cuts portrays the move as a dire indication of the weakness of the economy. The story led all three network newscasts Tuesday night. ABC World News reported, "The language was blunt. The action was urgent. [Tuesday], in an ever escalating effort to rescue the economy from deep recession, the Federal Reserve took sweeping steps and cut a key interest rate to the bone. The federal funds rate was slashed to between .25 percent and zero. The lowest ever." The CBS Evening News led its broadcast asserting that the Fed "says the economy, bad as it is, is getting worse, and it's ready to use every weapon in its arsenal to turn it around, beginning with this, free money."
NBC Nightly News noted that "one analyst called what happened [Tuesday] 'shock and awe.' He said the Federal Reserve...threw everything it had at the US economy." NBC added, "Most regular folks will notice two things, good news and bad. Some interest rates and mortgage rates will come down. And at the same time the money you put in the bank will earn next to nothing."
According to the AP , the Fed is "urgently rewriting its playbook to fight a deepening recession." After the rate cut, "Wells Fargo, Wachovia and US Bancorp immediately lowered their prime lending rates from 4 percent to 3.25 percent, and other banks will probably follow suit. Economists cautioned, though, that people frightened by the economy and worried about their own jobs may not feel like taking on more debt." The AP adds "the Fed's action was unprecedented in the central bank's 95-year history."
The Financial Times said that "the decision to set a range for interest rates reflects an admission that the U.S. central bank cannot tightly control the actual rate that prevails in the market in current conditions." The Wall Street Journal added that "the cut was more than many economists expected, and the statement that came with it marked the latest signal by the Fed and its chairman, Ben Bernanke, that the central bank was prepared to take aggressive steps to revive the economy. 'The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,' the Fed said in a statement. It added that it expected interest rates to remain 'exceptionally' low for some time, a subtle commitment to the current policy that could help bring down longer-term interest rates." The Journal points out that "beyond lowering interest rates, the central bank said it could expand lending programs, including a plan to buy mortgage-backed securities. The Fed also said it was studying such rescue measures as purchasing U.S. Treasury securities, which could help reduce long-term borrowing rates."
USA Today noted that "the Fed reiterated its earlier announcement that it will purchase up to $500 billion in Fannie Mae and Freddie Mac mortgage-backed securities and 'stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.'" The rate cut "came as the government released new data showing the worst housing market in decades and a second record-setting monthly decline in consumer inflation."
The Washington Post pointed out, "Christine M. Cumming, a vice president of the Federal Reserve Bank of New York, voted in place of New York Fed President Timothy Geithner, who is to be named Barack Obama's Treasury Secretary; the Fed attempts to maintain independence from political authorities."
Congressional Elections Update
Any developments related to the 2008 congressional elections were overshadowed by the arrest of Illinois Governor Rod Blagojevich on charges that he had attempted to sell the appointment to the Senate seat being vacated by President-elect Obama. It is unclear at this point whether the seat will be decided by a special election or whether a new Democratic Governor, current Lieutenant Governor Pat Quinn, will make an appointment. The prospect of a special election has given Republicans some excitement; current Congressman Mark Kirk (R-IL-10) is considered a strong challenger to whoever winds up as the Democratic nominee.
Otherwise, the Senate remains at 58 Democrats, 41 Republicans. Wrangling in Minnesota over ballots and procedures in the race between Republican Norm Coleman and Democrat Al Franken continued last week. The recount is scheduled to end Friday, December 19. Recent court challenges over absentee ballots may delay the recount proceedings slightly. Nonetheless, results are expected by the end of the month, at which point, further legal action or intervention by the U.S. Senate may be undertaken.
Economy Takes Center Stage in New Administration Personnel Announcements
The announcement of President-elect Obama’s economic team came just before Thanksgiving, with Tim Geithner, president of the New York Fed, being named the next Secretary of Treasury. Larry Summers, former Treasury Secretary under President Clinton, will head the National Economic Council advising President Obama.
New Mexico’s Gov. Bill Richardson will head the Commerce Department, bringing foreign policy experience to an office that can serve as a bully pulpit for trade.
Although certainly not as well-known a name, another key appointment was Christina Romer, a UC Berkeley economist and historian to chair his Council of Economic Advisers. Last week many people were circulating an article she and her husband David Romer had written for the National Bureau of Economic Research, in which they called tax increases “highly contractionary,” arguing, “the large effect stems in considerable part from a powerful negative effect of tax increases on investment.”
The President-elect has announced that Peter Orszag, director of the Congressional Budget Office, would serve as his Director of the Office of Management and Budget – another respected, experienced and moderate figure.
In addition, President-elect Obama announced that former Fed Chairman Paul Volcker would head a newly created Economic Recovery Advisory Board. Volcker is renowned for having taken the tough steps in the early years of the Reagan Administration to overcome stagflation.
Congress plans to stay in business after being sworn in the first week of January, preparing stimulus legislation for the President-elect’s signature as soon as he takes office on January 20.
NAM, US Chamber Back Obama's Stimulus Plan
The Hill reported: "Big business is lining up to support...Obama's plan to stimulate the economy with the biggest spending spree on roads, bridges and other infrastructure projects since the Eisenhower Administration." The Hill added that "business groups believe injecting funds into rebuilding America's roads and highways could put thousands back to work at a time of rising unemployment. As a result, lobbyists from the US Chamber of Commerce and the National Association of Manufacturers (NAM) are asking lawmakers and Obama's transition team to funnel federal funds to 'shovel-ready' projects as the best way to stimulate the flagging economy." The Hill noted that "not every GOP-leaning business lobby is as excited about Obama's plans. Jade West, senior vice president of government relations for the National Association of Wholesalers-Distributors (NAW), said her trade group is worried the massive spending -- lawmakers have talked of spending $500 billion to $700 billion for Obama's stimulus -- could lead to substantial tax hikes in years to come."
State Chamber/AIA Continues Fight Against EFCA
State Chamber President and CEO Randy Zook and other State Chamber representatives continue to speak to groups around the state to educate Arkansans about the misnamed Employee Free Choice Act (EFCA) and rally those in the business community to oppose it.
Presentations have been made before the Little Rock Rotary Club, Fayetteville Economic Development Group, Jacksonville Rotary, and the Russellville Chamber of Commerce. The latter presentation resulted in the recruitment of 90 new coalition members.
Future meetings are scheduled with the editorial boards of the Northwest Arkansas Times and Log Cabin Democrat. Zook is also scheduled to appear later this week on the Hot Springs radio show “Talk of the Town” with Rick Antoine. In January, meetings are scheduled with SECURITAS and several local chambers.
“The bill represents an unfair shift towards union interests,” Zook said, “For the sake of Arkansas workers and Arkansas business, we must do everything we can to persuade Senators (Mark) Pryor and (Blanche) Lincoln to vote against it.”
EFCA is dangerous and wrongful legislation that threatens to overturn more than 70 years of precedent in labor relations. If passed, the act would effectively revoke workers' rights to a private ballot vote when determining union representation. It would weaken business in Arkansas and around the nation, creating additional challenges and new burdens as we seek to create more jobs in America.
As members of Arkansas’s business community who are opposed to this measure, it is our duty to persuade members of Arkansas' Congressional Delegation to vote against EFCA. We ask you to write at least one letter to both of Arkansas' senators and to the U.S. House member who represents your district. Instructions and tips for letter writing are available online at www.yoursecretballot.com or by phone at 501-975-8344.
It is important that you provide us with copies of letters you send so that we can evaluate our activities and grassroots lobbying efforts. Please fax your letters to 501-975-6045.
All State Chamber/AIA members are strongly encouraged to spread the word about this issue to fellow members of the business community as well as to employees. It is vitally important that our members of Congress hear the business perspective on this issue. We thank you for your efforts, and look forward to hearing from you soon as we continue to work to preserve workers' rights to a secret ballot
White House Continues To Study Auto Bailout Options
AFP reported: "The White House said Monday it was studying options for a bailout of the U.S. auto industry without indicating when an announcement would be made. ... President George W. Bush, who has hinted the government could tap a massive federal rescue package to aid the automakers, was Monday on his way back to Washington after surprise weekend visits to Iraq and Afghanistan." President Bush "told reporters aboard Air Force One that 'this will not be a long process because of...the fragility of the autos.'"
Another AFP story noted that "the president's remarks came as lawmakers warned that time was running out for the auto giants, and traded blame with auto union chiefs over the collapse last week in the Senate of a short-term rescue bill." The Big Three US automakers "have warned of the potential for millions of job losses, which would send ripple effects through the already faltering economy." White House and Treasury officials have said "they were considering 'a full range of options,' according to one senior administration official."
The Wall Street Journal reported, "President Bush gave assurances that help is on the way," saying, "an abrupt bankruptcy for autos could be devastating for the economy ... We're now in the process of working with the stakeholders on a way forward. We're not quite ready to announce that yet." Meanwhile, "Treasury spokesman Brookly McLaughlin told reporters that department officials, who are working closely with the White House on the issue, are still studying pertinent data." The Journal added: "In weighing a much larger rescue effort for U.S. automakers than originally envisioned, the Bush administration faces a complex set of decisions over what terms to seek -- including whether to push the companies to file for bankruptcy -- and how to raise necessary funds. The administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more." The Bush administration "must also figure out whether, and how, to try to wring concessions from affected parties, including factory workers, dealers and holders of the companies' debt. Without such concessions, the companies are likely to need cash infusions long into the future, congressional critics say."
The Detroit Free Press reported that, despite President Bush's remarks, "the lack of certainty over the size of a rescue -- and when it might come -- had bankruptcy attorneys preparing for the worst over the weekend, and the industry remained on edge headed into the week. ... Several bankruptcy attorneys in southeast Michigan told the Free Press on Sunday they were consulting with anxious suppliers throughout the region over the weekend about how they might proceed if General Motors Corp. or Chrysler LLC were to file for bankruptcy -- or even if the automakers, who are running low on cash, didn't pay their bills on time. Such a failure could force many already fragile suppliers to file for bankruptcy protection themselves."
The New York Times added, "The threat of bankruptcy is evident every night at General Motors (GM) headquarters, when the lights are turned out early and the escalators and nearly all the elevators are shut down to save money." As sales "continue to plummet because of the weakening economy and the credit crisis, they are scrutinizing every budget line for potential savings." The article continued, "Time is running short for GM and Chrysler. …" Both automakers "have said they will run out of cash by the end of the year" but "both companies have said that filing for bankruptcy is a last resort and that they will continue to cut costs at every opportunity."
Final Rule Released on Employee Verification
The Department of Homeland Security (DHS) has released its final rule requiring all federal contracts awarded after January 15, 2009 to include a clause committing the company to use the E-verify system – an online system where employers can check the work status of new hires by comparing information from an employee’s I-9 form against Social Security Administration and DHS databases. The National Association of Manufacturers and other business groups have long been working to address shortcomings in the employment verification system and to develop a better system to authenticate the eligibility of a new employee’s work status. For more information about E-Verify and the NAM’s efforts to develop a workable, electronic employment verification system, access their toolkit at EV Toolkit.
U.S. Trade Deficit Increased In October
The New York Times reported: "The trade deficit widened in October for the first time in three months as exports dropped 2.2 percent, with big declines in sales of American-made products like automobiles and consumer goods. China, one of the larger sources of export demand, has cut back sharply, the Commerce Department said [last week]." The trade deficit "rose 1.1 percent in October, more than economists had expected, to $57.2 billion, up from $56.6 billion in September. It was the first trade report from the Commerce Department since the stock market took a dive in October and the first widening of the deficit since July." The Times adds, "Domestic demand has slackened, as well; the only increases in imports in October came from crude oil -- the price of which fell sharply over the course of the month -- and consumer goods. Sales of foreign-made automobiles and machinery fell sharply."
World Bank Predicts Global Economic Recession
On the front page of its Business Day section, the New York Times reported, "The world economy is on the brink of a rare global recession, the World Bank said in a forecast released [last week], with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent. The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty." The bank "forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. ... The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009." Deutsche Bank "was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity."
