Pennsylvania’s House of Representatives on Wednesday passed a bill allowing the state to borrow up to $4.5 billion in a bond issue to pay off lingering unemployment compensation debt.
Gov. Tom Corbett has said he would sign the measure, which he anticipates will make the state’s unemployment-compensation fund solvent by 2019. “This debt created an escalating per-employee tax and was threatening Pennsylvania jobs,” Corbett said after the vote.
The Senate one day earlier passed the bill by a 29-19 vote, mostly along party lines. The House vote, 129-67, was a concurrence.
More states are issuing bonds for this use, taking advantage of lower interest rates. “I expect you’ll see more of these deals in the coming months,” said LPL Financial market strategist Anthony Valeri.
Michigan has scheduled a $3.3 billion bond sale for June 14 to defease short-term debt issued in late December to pay off its federal unemployment liability.
Previously, Texas and Idaho issued similar bonds, and Illinois expects to go to market within a few months.
The economic downturn and the insolvency of the unemployment compensation trust fund have forced the borrowing from the U.S. Department of Labor to pay for the benefits. Pennsylvania law now has no provision that permits bond issuance to pay off the loan advances to the fund.
“From a credit perspective, you’re exchanging one form of debt with another, so you’re not adding debt per se, but you’re locking in a lower interest rate,” said Valeri. “State revenues are higher, but their budgets are still under stress, so why not save money?”
Natalie Cohen, a managing director and head of municipal research at Wells Fargo Securities LLC, called the borrowing option a better alternative to raising the tax on employers and slowing the economy, or paying a high penalty to the federal government.
According to a Wells Fargo report, persistent unemployment has left 30 states’ insurance programs insolvent and owing the federal government a combined $41 billion in loan payments.
Pennsylvania borrowed roughly $3.9 billion from the federal trust fund to cover unemployment benefits during the recession. Employers now pay an interest surcharge to the federal government to pay the debt, in addition to a payment under the Federal Unemployment Tax Act.
“Even without the recession and increased unemployment, our system was headed for a structural deficit because revenues to the fund were capped while benefits increased based upon the average weekly wage,” said Senate sponsor John Gordner, R-Berwick. “This legislation corrects the imbalance.”
The state’s Division of Labor and Industry would issue the bonds to refinance loans from the U.S. Department of Labor. The Pennsylvania Economic Development Financing Authority would be the conduit issuer.
Senate Minority Leader Jay Costa, D-Pittsburgh, favored requiring approval from the state auditor general or treasurer, which is necessary for a general obligation bond sale. Republicans, however, rejected the amendment.
“Given the size of this issuance, we would have liked to have seen a bit more public discussion,” said Michael Smith, a spokesman for Treasurer Rob McCord.
The bill is part of a package that tightens eligibility for unemployment benefits.
Rep. Mark Cohen, D-Philadelphia, opposed the measure as failing to meet the needs of unemployed persons, although he praised the bond provision as “a positive and constructive innovation” during floor debate late Wednesday afternoon.
The Pennsylvania Chamber of Business and Industry supports the bill.
Moody’s Investors Service rates Pennsylvania’s GO bonds Aa1, while Fitch Ratings and Standard & Poor’s assign AA-plus and AA, respectively.
