Cash flow problems with the state’s unemployment insurance trust fund will last longer than expected, new projections show, so the state is preparing to borrow again to keep paying benefits to the jobless.
The fund collects money from employers’ payroll taxes and pays out unemployment benefits to laid-off workers.
Although the state’s trust fund was one of the healthiest in the nation in the mid-2000s, it was completely depleted — and then some — by the length and depth of the recession.
Arizona, along with 35 other states, borrowed from the federal government to pay out unemployment benefits. The state also temporarily increased employers’ taxes in 2011 and 2012 and tightened eligibility for benefits.
Last year the state borrowed $200 million from a private lender so it could repay the government loan without paying interest fees or letting businesses take a federal payroll tax hike.
At the time, state leaders thought the trust fund would be solvent by now. But five years after the recession’s official end, even after the state paid off the private loan last month, projections show the trust fund will be in the hole by $3.6 million in the first quarter of next year, says a report from the Joint Legislative Budget Committee.
The state is ineligible for year-round, interest-free borrowing from the federal government because of the trust fund’s condition.
Officials say they will need to do some short-term borrowing from the federal government this year and next, and Arizona is still eligible to borrow interest-free if it repays the loan by the end of September in the same year, said Department of Economic Security spokeswoman Tasya Peterson.
DES already has set aside $1.8 million from the temporary tax that ended in 2012 to cover interest payments, she said.
“By the second quarter of 2015, the fund is projected to have a positive cash balance” as the economy continues to improve, she said. Most payroll taxes are paid by the second quarter.
Whether the fund will be rebuilt before the next recession is a problem with few appealing solutions.
The lack of reserves is “a very troubling situation” for businesses, said Farrell Quinlan, Arizona director of the National Federation of Independent Business.
One option: The state could move to further limit eligibility for benefits. But Arizona’s program is already one of the most restrictive, said Rick McHugh, a staff attorney with the National Employment Law Project.
Lowering the amount of benefits isn’t likely, either. Arizona hasn’t increased unemployment benefits in 10 years. The state’s average weekly benefit is about $222. The national average weekly benefit is about $310.
Another option is to raise taxes. The state has been charging employers at the maximum rate allowed by state law for the past two years and expects to charge that rate for the next two years, Peterson said.
The maximum rate is 6.38 percent, or $6.38 on every $100 of taxable wages.
Arizona employers pay the tax only on the first $7,000 of a worker’s wages, so the most an employer would pay per worker is $447.
That $7,000 is the lowest level permitted by federal law. All the other states except California have a higher taxable wage base, the U.S. Labor Department says.
Raising Arizona’s limit would be one way to help replenish the fund without raising the tax rate, McHugh said.
But Quinlan said the trust fund is low because of persistent unemployment, and raising taxes would only hurt businesses’ ability to create jobs.
Another option, preferred by the Arizona Chamber of Commerce, is to wait until the next recession and consider raising taxes if the trust fund is depleted again.