Pennsylvania, when its lawmakers convene next week, looks to become the latest state to consider issuing bonds to pay for billions of dollars in debt related to unemployment benefits.
Legislation to allow the state’s Division of Labor and Industry to issue bonds to refinance loans from the U.S. Department of Labor passed the House unanimously last week, and is headed to the Senate. The Pennsylvania Economic Development Financing Authority would be the conduit issuer.
Prolonged economic troubles and the insolvency of the unemployment compensation trust fund have forced the borrowing from the Department of Labor to pay for the benefits. Twenty-seven states plus the U.S. Virgin Islands owe the federal government a combined $39.4 billion, according to Labor statistics. California has the biggest debt, $9.8 billion.
Pennsylvania law now has no provision that permits bond issuance to pay off the loan advances to the fund.
Michigan on Tuesday sold $3.3 billion of short-term, variable-rate bonds to pay off its mounting federal unemployment liability, seven days after Gov. Rick Snyder signed the enabling legislation. The interest rate was 0.24%, compared with the federal rate of 4.1%, which could drop to the 3% range next year.
“It seems to me that this is a legal arbitrage way of doing it,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “In one sense it’s a no-brainer. They’re not adding debt, they’re shifting it from one side to the other.”
Texas and Idaho made similar moves, while Pennsylvania joins Illinois and other states considering the option.
Pennsylvania’s unemployment debt as of Tuesday was $3.2 billion. The state began the borrowing in March 2009.
“The question is, is there a way that we can bond that money, borrow it on our own, pay back the federal government, and reduce the impact on Pennsylvania employers?” said Rep. Ron Miller, R-Jacobus, who sponsored the legislation in the House.
Miller said the state is under a time constraint. “If we’re going to do bonds in a timely manner for 2013, bond counsel and the Department of Labor and Industry need legislation enabling that so we can protect the employers in the next year because this will be an ongoing process until the federal debt is paid off,” he said.
The Senate sponsor is John Gordner, R-Berwick.
The Pennsylvania Chamber of Business and Industry lauded the bill, which would establish a temporary amnesty program to allow delinquent businesses to waive 50% of their interest payments if they pay the principal debt in full, and to authorize the Department of Labor and Industry to target businesses evading unemployment compensation taxes and recoup illegitimate overpayments to claimants.
“The business community applauds lawmakers for taking the steps this year to get a handle on” the problem, chamber president Gene Barr said in a statement.
Gov. Tom Corbett signed a companion bill on June 17, ensuring the continuation of a federally funded, 13-week period of extended unemployment compensation benefits for 45,000 residents.
Fitch Ratings assigns a AA-plus to the state’s general obligation bonds. Moody’s Investors Service and Standard & Poor’s rate them Aa1 and AA, respectively.
