DALLAS — Arizona will issue $200 million of tax anticipation notes for its unemployment insurance program, which is coping with a jobless rate above the national average amid federal budget cuts.
The issue is the first for the insurance program, said Tasya Peterson, spokeswoman for the Arizona Department of Economic Security.
The notes will be issued in two series of $75 million and $125 million on Sept. 17, Peterson said. Proceeds will be used to repay advances from the federal government to the state's account in the Unemployment Insurance Trust Fund, and make a deposit to the fund.
"This note issuance will save Arizona employers approximately $100 million in increased federal unemployment taxes they would have incurred in 2014 if the State did not re-pay its outstanding borrowings with the federal government related to unemployment benefits," Peterson said.
RBC Capital Markets is senior manager on the deal, with Piper Jaffray as financial advisor.
The notes have earned top short-term ratings of SP1-plus from Standard & Poor's and MIG 1 from Moody's Investors Service.
"We base the rating on the strength and predictability of state unemployment insurance taxes that flow into the state unemployment insurance fund," Standard & Poor's credit analyst David Hitchcock said in a statement.
"We anticipate a favorable response from the market given the solid financial footing of Arizona's unemployment insurance program as reflected in the note ratings that have been received," Peterson said. "As the notes mature in roughly eight months, we expect interest from money market and other institutional investors seeking short term, high quality investments."
Principal on the notes will come from unemployment insurance taxes collected in 2014. Interest is derived from money on hand deposited in the interest account at closing.
"Despite a borrowing amount which is high as a percent of available receipts compared to typical cash flow notes, the MIG 1 rating reflects reasonable cash flow projections showing a strong ending cash balance following note repayment and payment of benefits, and additional liquidity provided by ability to use new federal advances to pay benefits if needed," wrote Moody's analyst Kenneth Kurtz.
"Other positive factors are the size and diversity of the employer base paying the taxes, strong collection mechanisms, and positive trends in tax collections and state economic indicators," he wrote.
Under federal law, money in the unemployment insurance trust fund may only be used to pay unemployment insurance benefits, repay federal advances and principal on the notes. They may not be used to pay interest on the notes.
State unemployment insurance taxes, which are separate from federal unemployment insurance taxes, are paid by employers on the first $7,000 of employee earnings at experience-based rates averaging 2.4% of the wage base.
"The tax base is large and diverse, consisting of approximately 102,000 employers throughout the state representing the entire spectrum of the state's diverse economy," Kurtz noted. "Enforcement mechanisms are strong and include the ability to place liens on employers' property and bank accounts."
The unemployment insurance taxes are paid quarterly and, historically, an average of 60% of annual tax revenues are received in the second quarter of the calendar year, according to Kurtz.
Like unemployment trust funds in other states, Arizona's was depleted in recent years due to declining tax collections and increased benefit payments resulting from the recession that began in 2008.
Because Arizona's fund was relatively well-funded prior to the recession, it didn't require an advance from the federal government to offset a shortfall until the first quarter of 2010, later than many other states.
Federal advance balances peaked at $421.9 million at the end of the first quarter of 2012.
As of Aug. 12, the outstanding advance balance equaled $102.3 million.
Department officials project that outstanding advances will equal approximately $140.5 million as of the end of September. Officials also project that federal advances will be fully repaid in 2014, even without the issuance of the notes.
Arizona carries issuer credit ratings of AA-minus from Standard & Poor's and A1 from Moody's.
To cope with the recession that hit the state in 2008, Arizona carried out budget cuts, with numerous showdowns between Republican Gov. Jan Brewer and a legislature controlled by her own party.
The fiscal crisis grew so bad that in 2010 the legislature authorized a deal to sell the state capitol and other buildings for $750 million under a lease-revenue issue.
At the same time, the state issued $422 million of lottery bonds maturing in 2029 and, at Brewer's urging, passed a three-year sales tax increase of 1 cent that expires in 2014. The tax hike required voter approval.
Since the collapse of the housing market that hit Arizona particularly hard, the economy has been gradually improving.
For Arizona's unemployed, however, the economy has not fully recovered.
At 8%, the Arizona unemployment rate remained above the national average of 7.4% in July. The unemployment rate in Arizona peaked in January 2010 at 10.8%. From a post-recession low of 7.8% in May 2013, the unemployment rate has now grown by 0.2 percentage points, according to the Arizona Bureau of Labor Statistics.
Unemployed Arizonans are impacted by the federal sequester.
The Arizona Department of Economic Security announced earlier this summer that unemployment insurance claimants could expect to see a 16.8% reduction in their claims. The maximum weekly claim was reduced to $200 per week from $240 under provisions of the federal Budget Control Act of 2011 that imposed across-the-bard cuts commonly known as "the sequester."
The Arizona DES also closed its Phoenix-based Unemployment Insurance Call Center, due to a reduction in federal funding. The cutbacks coincide with fewer unemployment claims, declining from a high of more than 200,000 in 2010 to less than 75,000 in the first part of January 2013.
The administration of the Arizona Unemployment Insurance program is 100% federally funded. Funding is based on several factors, including the number of individuals receiving benefits.
"Because the number of individuals receiving benefits declined by 40% from 2012, the department has seen funding decrease by 20% from the federal government for the 2013 fiscal year," the DES explained in statement about the cuts.
Arizona is not alone in making cuts to its unemployment insurance program. A recently released survey from the National Association of State Workforce Agencies found declining federal funding to operate the unemployment insurance programs would lead to staffing reductions in at least 21 other states.
