Costly unemployment tax increase averted

Yesterday, Kentucky paid the first interest payment due to the federal government for money borrowed to pay unemployment claims. By paying it prior to the Sept. 30 deadline, Kentucky employers will not lose the federal tax credits worth a total of $600 million.

For weeks, the Kentucky Chamber has been warning officials that a loss of the federal unemployment tax credit would be devastating to Kentucky employers. During those same weeks, the governor and legislative leaders have indicated a willingness to address the issue before the September 30 deadline. Because the General Assembly is not in session, only the governor could act to avoid the loss of credit by either calling legislators to Frankfort for a special session or finding a mechanism by which the state could make the interest payment.

Despite calls for a special session by legislators on both sides of the aisle, Gov. Beshear opted to avoid a special session and make the payment by authorizing a cash flow transfer to the dedicated account created to pay this interest. The governor explained the transfer in a press release issued late yesterday:

After exhausting all possible options for federal relief, Gov. Beshear authorized the full payment of Kentucky’s interest bill. State law mandates that these interest payments be paid in a timely manner from the Unemployment Insurance Penalty and Interest Account. That account had a balance of $9.8 million, and Gov. Beshear authorized loaning the remaining $18.4 million to the account from the Commonwealth’s management of its overall cash flow.

This internal loan will be managed similarly to other funds where the timing of revenue intake and spending differs within a fiscal year, such as with the Tobacco-Master Settlement Agreement Funds. The $18.4 million internal loan must be repaid by the close of Fiscal Year 2012.

The action taken by Gov. Beshear averts the immediate crisis, but does not address the long-term payment of interest in the future. By “loaning” money to the fund, the governor’s action will require the General Assembly to take action in 2012 to “repay” the loan and to find a funding mechanism for future interest payments. Based on projections by the Unemployment Insurance Task Force Report, Kentucky will have to make these interest payments for the next 4-6 years until the full loan to the federal government is repaid.

The Kentucky Chamber will work with the General Assembly and the administration to find a long-term solution in the best interest of employers that will prevent this sort of crisis in the future. For now, employers across the state can breathe a sigh of relief that action has been taken to avoid what would have been a devastating tax increase. View a message from Dave Adkisson on our YouTube Channel.