Bonds to pay off unemployment debt would save money
January 19, 2013
Gov. Brian Sandoval’s proposed budget calls for an innovative answer to paying down the massive $703 million unemployment insurance debt.That debt was run up over the past four years as thousands of Nevadans sought unemployment benefits after losing their jobs. The sheer number of unemployed rapidly used up the reserves Nevada had built up to pay benefits. That forced the Employment Security Division to borrow from the federal government to continue paying unemployment checks.Sandoval mentioned briefly in his State of the State address that his administration planned to restructure that debt. What that means is to pay off those federal loans with cash raised by selling bonds.The plan would use revenue bonds backed by existing unemployment insurance taxes.Dennis Perea, deputy director of the Department of Employment, Training and Rehabilitation, said that saves the state money because the interest rate on the bonds would be significantly lower than the interest the federal government is charging the state. The state had to pay the federal government about $23 million in interest in each of the past two years.He and DETR economist David Schmidt said the current federal interest rate is 2.58 percent. They said the bonds would probably sell at less than 1.5 percent.Perea said not only would the state be able to pay off that debt by 2016, it will save millions in interest.Asked whether the tax can generate enough revenue to pay both current benefits and a bond payment of $175 million a year, Perea said the current levy is already paying benefits and reducing the debt. In fact, the debt has decreased nearly $100 million during the past year and, as the economy improves and unemployment continues to go down, more of that money will be available for debt service.“Essentially we would expect the current tax rate to pay down the principal,” he said.The proposed budget does, however, contain a small assessment on businesses to pay the interest on those loans since federal law prohibits using the state unemployment tax to pay interest estimated at just less than $32 million during the next two years.Perea said that assessment won’t bother the businesses because paying off the debt will bring an immediate decrease in the federal unemployment tax.If the state isn’t making significant progress paying back unemployment insurance loans, the federal government comes in and raises the tax on businesses. The total federal tax is now 1.2 percent and, if nothing is done about the debt, will rise to 1.5 percent next year. Once the loan is paid off with bond money, the rate drops back to six-tenths of a percent — saving much more than the increase needed to pay the interest.“It’s hard to explain to the business community that we’re going to have to raise their taxes to keep their taxes low,” Perea said.While innovative, the idea isn’t exactly original. State Treasurer Kate Marshall suggested bonding to pay the debt two years ago. Neither the governor’s office nor the Legislature acted on that suggestion. There were, however, significant differences between the plan she presented and this proposal.DETR plans to submit legislation creating the interest assessment as well as authorizing the bonding plan.