Hawaii’s recession-stricken businesses are on the hook for a $700 million loan the state took out to pay unemployment benefits to people who were put out of work during the pandemic, and lawmakers wonder now how the business community can possibly be expected to pay that money back.
Members of Gov. David Ige’s administration were questioned during House Finance Committee meetings this month about the enormous sum owed to the federal government, a debt that is growing as the state continues borrowing to cover the cost of Hawaii workers’ jobless benefits.
House Finance Chairwoman Sylvia Luke said Hawaii businesses cannot possibly pay off that debt by the November 2022 deadline to retire the loan, and said the administration should be prepared to help.
If the loan is left entirely to the business community to repay through unemployment taxes and other surcharges, “basically you guys will force employers out of business, because they can barely keep their business afloat, and then you are going to hit them with a huge price tag.”
State Finance Director Craig Hirai said the administration plans to reach out to Hawaii businesses to discuss how to manage the debt. The state could issue revenue bonds to raise cash to repay the federal government by 2022, he said, giving the local business community more time to repay the loan.
“It’s not legally an obligation of the state, therefore we should be working with (the state labor department) and, in turn, with the employers to see what the most reasonable approach is,” Hirai said.
He added: “I guess it’s really up to the Legislature to decide whether we want to pick up any part of that debt, which we’re not legally obligated to do.”
Luke told Hirai the “right thing to do” would be to convince the federal government to forgive the loan. “Just kind of realistically and just rationally, just doing the math, there is no conceivable way the businesses can bear it,” Luke said.
More than 30,000 Hawaii businesses are covered by the unemployment insurance program, and those companies finance the state unemployment trust fund through payroll taxes.
The Hawaii trust fund held $600 million at the end of 2019, but was quickly drained last year as much of the local economy shut down during the pandemic. The state unemployment rate topped 23% in April, and tens of thousands of workers filed for unemployment benefits.
Once the UI fund was depleted, the state began borrowing from the federal government to continue to pay benefits. As of Thursday the state owed $700.7 million in loans under the program, money that employers are obligated to repay through a surcharge on their unemployment taxes.
That extra surcharge would be on top of potentially huge increases in unemployment insurance premiums that are expected to fall on employers as the state increases those premiums to replenish the state unemployment trust fund.
The Ige administration has announced it will introduce a bill to try to limit the increases in UI premiums that employers must pay, which could triple if the state does not intervene. But it is unclear what the administration plans to do about the loans.
The administration budgeted $36 million over the next two years to pay the interest on the UI loan, but has not said how the principal will be repaid. If the loan is not repaid, the Federal Unemployment Tax Act calls for the federal government to suspend a federal tax credit that Hawaii employers now enjoy.
FUTA imposes a 6% federal unemployment tax rate on the first $7,000 in employee wages paid annually to each worker. But employers in states that are in compliance with the federal law and have no outstanding UI loans enjoy a much lower FUTA tax rate of 0.6%.
If the $700 million Hawaii loan or an even larger loan is outstanding after Nov. 10, 2022, Hawaii employers will begin to lose that credit. The U.S. Department of Labor will phase out the credit in a series of steps that escalate significantly after three years.
The extra financial burden on Hawaii employers from the partial loss of the FUTA tax credit would be in addition to the potentially huge increase in the basic unemployment premiums that employers may have to pay to replenish the Hawaii UI trust fund.
State Rep. Lisa Marten, who was elected to the seat representing Kailua and Waimanalo last year, argued last week there is a “moral argument” to be made for the state to take responsibility for the huge loan.
“Businesses were asked to shut down as part of our statewide effort to control COVID, so it’s not as if they had failing businesses and got into trouble because they weren’t good business people,” she said.
Ige’s Chief of Staff Linda Chu Takayama replied that “we were following what is in state statute.”
Takayama said the Legislature has the option of paying off the UI loan with state general funds, but warned “we’re already in a deficit situation of more than $1 billion, so to put another $1 billion on top of that might be a bit too much, but that’s something for you all to consider.”
Rep. Bert Kobayashi told Hirai that employer groups won’t welcome any proposal to add debt service for the UI loan on top of their increasing unemployment insurance premiums.
“Talking to them will be a good exercise, but I don’t think it will provide you with a volunteer to repay $700 million,” Kobayashi said. “I mean, who’s going to volunteer to do that?”
Hirai replied that “it’s not a mater of volunteering. I think the feds are going to do something to them if we don’t work out something.”
But Luke argued that adding loan repayment to the UI insurance premium increase “is just impossible, inconceivable in this climate,” Luke said.
Sherry Menor-McNamara, president and CEO of the Chamber of Commerce of Hawaii, said that with unemployment premiums set to increase dramatically in March, adding the burden of the huge UI loan will only make things worse.
“To put it on the businesses, especially right now when it will take years for economic recovery, that’s like a tidal wave that’s going to wipe out businesses for sure,” she said in an interview.
“Businesses didn’t cause COVID. Businesses didn’t cause this recession. It was a pandemic, and we don’t agree that it’s incumbent on businesses to pay the loan,” Menor-McNamara said. Other states have the same problem, and the hope is that Congress can forgive the loans, she said.
Several lawmakers including Senate President Ron Kouchi expressed hope that the federal government may forgive the UI loan, but U.S. Rep. Ed Case said the state should not count on that.
“There are several states in the same situation of substantial loans from the federal government to cover unemployment fund shortfalls, and Congress has considered and is considering some adjustments in future federal emergency assistance packages,” Case said in a written statement.
But Case also noted that Congress did not offer full forgiveness of similar UI loans after the Great Recession, another time when states had to borrow to make unemployment payments.
“So the reality is that, at present and unless and until there are real prospects for further federal assistance, the state cannot and should not rely on the possibility of federal forgiveness in factoring the loan into budget decisions,” Case said.
When asked whether Congress might provide help with the UI loan issue, U.S. Sen. Brian Schatz replied in a written statement that “our first order of business should be a new COVID-19 relief package with new funding for state and county governments.”
“I’m hopeful we’ll be able to get that done with the new Biden Administration and provide some help to our state and counties,” Schatz said.