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Businesses could save $327M if state pays off federal loan

October 15, 2015

Indiana businesses will save $327 million next year if Gov. Mike Pence moves soon to pay off a federal loan that propped up the unemployment program during the Great Recession.

The State Budget Committee—made up of four legislative fiscal leaders and Pence’s budget director—is expected to consider a plan Friday that would use $250 million from the state’s general fund to eliminate the balance of the loan from the U.S. Department of Labor.

The state will then recoup that money from employer payments that are already scheduled to go into the state’s unemployment trust fund next year.

The timing of the transfers matters. If the state still has an outstanding loan balance on Nov. 10, employers will continue to pay a penalty that in 2016 would total $126 per employee. That’s up from the $105 per employee they paid this year.

Barbara Quandt, the Indiana director of the National Federation of Independent Business, said the penalty payments have been “a huge problem” for many employers and keep them from making other decisions about hiring or expanding.

“This will mean $327 million that will not go to the federal government and will stay in Indiana,” Quandt said. “For small businesses, it will mean keeping the money in their companies for raises and new employees, for equipment, for other costs. It will be great for the Indiana economy.”

Pence will make the final decision about paying off the loan. But Josh Richardson, the deputy director of unemployment insurance operations at the Indiana Department of Workforce Development, said there hasn’t been “a single argument against it.”

“Everybody is on board,” Richardson said, especially because the move won’t reduce the state’s cash surplus in the long term. The general fund will be paid back by June 30, the end of the 2016 fiscal year.

Micah Vincent, director of the Indiana Office of Management and Budget, said the move is important because “the penalty is a tax on hiring” and a drag on the Indiana economy.

In all, Indiana borrowed some $2 billion from the U.S. Department of Labor during the last economic downturn because the taxes that employers were paying into the unemployment fund weren’t enough to pay the benefits owed to out-of-work Hoosiers.

Many other states borrowed as well. But Indiana was one of the first to need the help and is one of the last to pay off the loans. As of Oct. 10, the state owed $253 million. In addition to Indiana, only California, Connecticut, Ohio and the Virgin Islands continue to have outstanding loans.

Federal officials have been recouping their money by imposing penalties on Indiana businesses. That started several years ago at $21 per employee. The amount has increased by $21 every year until the annual payments reached this year’s total of $105. Paying off the loans stops the penalties.

“We really view this as kind of a no-brainer,” said Kevin Brinegar, president of the Indiana Chamber of Commerce.

So does Senate Appropriations Chairman Luke Kenley, who serves on the State Budget Committee. “It would save [businesses] a pretty substantial amount,” Kenley, R-Noblesville, said. “It looks like that’s a good step to take.”

The federal penalties come on top of the standard $42 per employee that all companies pay the federal government for unemployment insurance, plus payments they make to the state system based on their layoff histories. Companies that have used the system by laying off workers pay higher rates than those who haven’t.

The state is also imposing a surcharge—which fluctuates with interest rates—that generates revenue to pay the interest on the federal loans. Those will continue for another year, state officials said.

Those payments are part of the unemployment system overhaul the legislature passed in 2011. The 2011 law forced business to pay about 80 percent more in total taxes than they had previously. It also reduced benefits for unemployed Hoosiers by roughly 20 percent overall.

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