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Unemployment Compensation

September 03, 2004
By: David Ferrucci
State Capital Bureau
Links: HB 1268, SB 733

JEFFERSON CITY - As many unemployed Missourians are collecting assistance from the state as they seek new jobs, they're putting the state into a debt.

It's a debt that is forcing Missouri to borrow from the federal government as require by federal law. It also is a debt with an interest rate far higher than the state would pay if it were to borrow the money from private investors through a bond issue.

The higher interest rate has led Lt. Gov. Joe Maxwell to urge a special session of the state legislature in mid-September when lawmakers will be in session to consider bills vetoed by the governor.

Earlier this year, the legislature passed authorization for a bond issue so they could get the needed unemployment compensation money at a cheaper rate than charged by the federal government.

But state officials were told last week that the legislature's plan has run into a constitutional barrier that only the legislature can fix.

The Unemployment Compensation Fund ran out of money in March 2003 and has been forced to borrow money from the federal government for more than a year. The fund has been insolvent twice before -- during the 1983 and 1992 recessions.

The legislature's solution was to float a $450 million bond issue to pay off the federal debt. The administration predicts the interest rate on those bonds would be no more than two percent -- nearly one third of the rate the federal government charges Missouri.

Maxwell, who is a member of the state's Fund Commissioners Board authorized to sell the bonds, said a special session is needed to follow up on appropriations.

But at its last meeting, the commission encountered a problem. Under the law, the bonds are to be paid off by adding a surcharge to the normal fee employers pay to finance the Unemployment Compensation Fund.

But some business organizations, and Maxwell, argue that surcharge is restricted by a provision in Missouri's state constitution that limits the taxes legislators can pass without voter approval.

And without an ironclad guarantee for the bond investors, the state would face higher interest rates to sell the bonds.

"The reality is that the bill didn't do what the legislature thought," Maxwell said.

"The bond deal, meant to save employers money, is the segment of the bill that doesn't work."

Maxwell said the constitutional limit on taxes the legislature can approve would cover only one-fourth of the original bond plan -- $120 million rather than the $450 million.

The tax limit provision is contained in a constitutional amendment approved by state voters in 1996. The "Carnahan" amendment, so-called because of backing by Gov. Mel Carnahan -- along with the Farm Bureau -- puts a limit on tax and fee increases the legislature can pass in any one budget-cycle year without voter approval. For the current budget year, the administration puts that limit at about $75 million.

"The legislature anticipated us borrowing almost $450 million to not only pay off this calendar year, but the previous borrowing as well," Maxwell said. "And there is just no way we can borrow $450 million under the...amendment."

Maxwell said there are three or four bills that went into effect in August costing around $25 to $30 million that will count against the $75 million constitutional cap. The commission would only be authorized to increase the surcharge on employers by around $40 million a year.

"It's a three year deal so we can multiply the payments but it is no where near what the legislature originally anticipated," Maxwell said.

"We should proceed with full haste to get this borrowing done by the end of September in order to save the employers $5 million," Maxwell said. "Even though we can't do the whole deal we should do everything we can under Hancock and save the employers that amount of money."

One proposal for the special session would be to appropriate bond payments from existing revenues and thus provide a guarantee for bond investors.

The funding problem came as no surprise to several business interests throughout the state. One group, Associated Industries of Missouri, led the opposition against the bill.

"There was a myriad of us who worked in opposition, ourselves, NFIB, Associated General Contractors, wholesalers, retailers, in fact every business group in the state except for one didn't agree with the bill," said Gary Marble, president of AIM.

Marble said the bill not only raised the base tax on employers but also added a surcharge that was unconstitutional. Rep. Todd Smith, who sponsored the bond-issue bill, disagreed. He said the bill clearly states that these are not state funds and therefore do not fall under the Hancock provision.

"This is not a general tax increase; this is basically just to restore the fund," Smith said. "Unemployment compensation is paid for 100 percent by employers in the state and this is just a matter of replenishing it like it should be.

The governor said he has not yet made a decision about a special session. House Speaker Catherine Hanaway, R-St. Louis County, said she would support a special session only if there's an agreement reached that would allow quick passage of a bill.