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The State’s Unemployment Debacle – Who’s Bailing Out Whom?

The General Assembly is putting South Carolina taxpayers on the line for another $77 million to help bail out the state’s unemployment insurance system.

That's on top of $146 million taxpayers already have been forced to put into rescuing the system.

The practical effect of the bailout is that taxpayers are being tapped to hold down unemployment tax increases on companies.

Yet the unemployment tax rates businesses pay, according to some state senators and other knowledgeable observers, were kept unrealistically low for years, contributing to a train wreck of epic proportions.

U.S. Department of Labor statistics on unemployment taxes among the states over the past five years show a mixed bag in terms of South Carolina’s assessments, with one notable standout:

The amount of annual wages subject to taxation in this state has tended to hover at or near the bottom.

That has provoked questions as to who’s really bailing out whom in the unemployment insurance system.

The state’s tax structure also has proven to be a sore spot for observers like Sen. Greg Ryberg, R-Aiken.

“Pigs get fat and hogs get eaten, OK?” Ryberg said on the Senate floor last month.

He was criticizing a letter from the South Carolina Manufacturers Alliance and other state business groups imploring the Senate to spend more public dollars to lower their unemployment tax rates.

“I guess Sen. Ryberg wanted us to be grateful that the General Assembly was going to take less of our money,” responds Lewis Gossett, president and CEO of the Manufacturers Alliance.

So about that train wreck:

Like many states, South Carolina exhausted its unemployment trust fund and ran up a huge federal debt paying jobless benefits during the Great Recession. As of Tuesday the Palmetto State’s red ink totaled more than $782 million, down from a high of nearly $1 billion.

The debacle resulted to a large degree from bureaucratic bungling at the former S.C. Employment Security Commission, according to a January 2010 report by the Legislative Audit Council.

“While agency management knew as early as 2001 that fund reserves were inadequate, management did not aggressively pursue changes to (unemployment) benefits, or the tax structure, in order to prevent the insolvency of the trust fund,” says a summary of the report.

Confirming the contention of the Ryberg camp, the report also attributed the meltdown to problems with the state’s unemployment tax structure.

Among its findings on that issue the Audit Council wrote, “Compared to neighboring states, South Carolina taxes are lower for businesses which ‘overuse’ unemployment benefits and higher for employers who rarely or never use the system.”

To help pay off the state’s debt, the General Assembly appropriated $146 million in the current fiscal year.

In addition, both the House and Senate have earmarked another $77 million for the bailout next fiscal year, which begins Sunday, as legislators work to finalize a spending plan for the new budget calendar.

The additional $77 million would bring the total taxpayer dollars applied to the state’s unemployment debt – so far – to $223 million.

However, the $146 million this year was not used to make supplemental payments on the money the state owes the feds. The same would be true of the $77 million next fiscal year.

Rather, those dollars are used to subsidize lower unemployment insurance tax rates for businesses. Absent the $223 million, their tax rates would be higher.

“The appropriated funds are to be used to make loan repayments that would have been made from contributions received from businesses,” Adrienne Fairwell, spokeswoman for the S.C. Department of Employment and Workforce, said in an email.

The Audit Council report led to legislation that abolished the Employment Security Commission, which was governed by a legislatively appointed board with three members who were all former lawmakers, and created the Department of Employment and Workforce in its place as an agency of the governor’s cabinet.

The legislation also restructured the state’s unemployment tax rates to pay off the federal debt and rebuild the state’s trust fund.

The state is on track to complete the payback by the end of 2015, Fairwell says.

That’s with or without the additional $77 million, Department of Employment and Workforce director Abe Turner told the Senate Finance Committee in April.

But for many businesses, the unemployment overhaul resulted in higher taxes.

And for some companies, the increases were simply too much to take, Gossett says. “So we certainly wanted some relief.”

He says the business community has never taken a position that it should have no role in repairing the state’s unemployment finances.

Indeed, Gossett says it is fair to assert that the previous amount of annual wages subject to taxation in South Carolina – the first $7,000 only – did not keep pace with changing economic times “for years.”

In 2008, when unemployment was skyrocketing in the height of the recession, that $7,000 cutoff was tied with seven other states for lowest in the nation, according to the U.S. Department of Labor data.

By 2010, the amount had not changed and only five other states were sticking with it.

The threshold began to increase under the legislation, to $10,000 in 2011 and $12,000 this year.

The new tax rates put South Carolina’s bottom-tier assessment, 0.1 percent, among the lowest in the nation; and, conversely, its top bracket, 11.28 percent, second only to Massachusetts with 12.27 percent, according to the federal statistics.

“Keep in mind, no matter how you slice it, this was a dramatic tax increase,” Gossett says.

The $146 million this year and the $77 million proposed for next year simply offset some of it, he says. “We are looking at a smaller tax increase, and I’ve always wondered how the no-tax people passed this,” Gossett adds.

He says he also wonders why the Legislature chose not to use part of an extra $1 billion-plus in state revenues for next fiscal year to help pay down the debt.

Speaking to “colossal waste and mismanagement” at the Employment Security Commission, Gossett says the $223 million in unemployment tax relief for businesses amounts to the General Assembly merely acknowledging its shared responsibility in cleaning up the mess.

But be that as it may, Ryberg took umbrage with what wasn’t in the business groups’ letter.

“I don’t see anywhere in here though that addresses the fact that for a 10-year period of time, they didn’t pay the appropriate rates in order to keep the (unemployment insurance) fund solvent,” the senator said.

So, because a legislatively governed agency ran the state’s unemployment system into the ground – and because unemployment taxes on businesses remained unchanged for years – South Carolina taxpayers are being forced to help pay for a disaster costing hundreds of millions of dollars.

Reach Ward at (803) 254-4411 or eric@thenerve.org.

Accountability Budget General Assembly Taxes

S.C. Employment Security Commission Abe Turner South Carolina Manufacturers Alliance Sen. Greg Ryberg Legislative Audit Council S.C. Department of Employment and Workforce