CHICAGO — Michigan would issue $3.2 billion or more of bonds to repay federal loans for unemployment benefits under a pair of bills that the Senate Finance Committee unanimously approved Wednesday.
The legislation would make Michigan the third state to issue bonds to cover its federal unemployment liability, and the one with the largest offering. Texas sold $1.2 billion of bonds last November to pay off its federal shortfall, and Idaho sold $187.5 million in August. Both were highly rated deals that saw significantly lower rates than the 4.1% that states pay to the federal government on its loans.
Several other states are considering the option as they struggle to maintain their unemployment trust funds amid climbing jobless rates and turned to Washington for loans over the past few years. Until last January, those loans were interest free due to a stimulus act provision. Now many states, like Michigan, are facing high interest payments starting this year.
"If you can lock in a rate at or below the existing federal rate, you've given yourself some protection," said Chris Dembowski, a principal with the Lansing-based office of Miller, Canfield, Paddock and Stone PLC.
The legislation comes a month after Michigan was forced to dip into its general fund to cover its September interest payment on its unemployment debt. The annual interest payment totaled $106 million, and the state used $38.5 million from its general fund to cover a shortfall. The proposed borrowing would include an additional $38.5 million to replenish the general fund, state officials said.
Supporters, which include Gov. Rick Snyder, reportedly want the legislation passed by the end of the year in order to enter the bond market in early 2012.
"The impetus behind these bills is that we're paying 4.1% interest rate on this debt," said Senate Fiscal Agency analyst Josh Sefton. "It's fairly short-term debt — we're projecting to pay it off between six to eight years, assuming there is no more borrowing — and with similar municipal bond rates, we'd do a lot better."
The full Senate was expected to consider Senate Bills 483 and 484 Thursday, but a vote was held to allow time for a last-minute third companion bill, which includes changes to the state's unemployment act, to move through committee. The bills will now not be considered until Nov. 29 at the earliest, as legislators recess for the next two weeks for their annual deer-hunting break.
The bills would authorize the Michigan Finance Authority to float bonds to cover the state's unemployment insurance liability, which now totals $3.2 billion. There is no cap on the amount or maturity of the debt that can be issued.
The legislation would replace two of the three taxes now paid by employers to cover unemployment benefits with a new unemployment obligation assessment on the first $9,000 of wages paid to employees. The assessments would pay off the bonds.
The state treasurer would be allowed to set the rate of the assessments, which would be set to provide sufficient coverage of debt-service payments. The debt would be special purpose bonds with no general obligation pledge.
Michigan has considered issuing bonds to cover a mounting federal uninsurance debt at least twice before, but each time the economy recovered quickly enough to allow the state to pay off the liability without borrowing, Dembowski said. "In the prior years, the state managed to get themselves out of it in a couple years," he said.
State fiscal analysts estimate that if the state does nothing, it will take until 2018 to pay off the debt. Adding to the problem is that every year the state carries a debt, the federal tax rate rises.
"You really get a drag on trying to create new job development because you have this spiking of the unemployment costs and the longer it goes on, the more of an impediment it becomes," Dembowski said.
Michigan's solvency tax, one of three taxes employers pay to cover unemployment, is 0.75% on the first $9,000 of income. It was first imposed in the early 1980s to create a revenue stream to cover interest payments on the debt — but 30 years later, a 0.75% tax does little to address federal interest rates, which are reset annually.
"There's a lingering issue from a fiscal perspective for the state, which is that 0.75% is not high enough to pay our interest, and that's one of the shortfalls," Sefton said.