Report: ESC Failed to Avert Disaster

January 26, 2010

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The NerveA Legislative Audit Council report released this morning paints a damning picture of the S.C. Employment Security Commission, laying blame at the commission’s feet for mismanaging the state’s unemployment insurance fund into $736 million in federal debt and climbing.

In a nutshell, the report says the disaster was preventable. But the Employment Security Commission (ESC) allowed it to occur because of a laundry list of failures by the agency, including not following state law and federal guidelines.

The debt in the fund, from which weekly unemployment checks are paid to tens of thousands of South Carolinians, is not just a problem for the General Assembly and state government, either.

Indeed, South Carolina taxpayers – mainly businesses – could be on the hook for it.

Among the most shocking findings detailed in the report:

 

  • “While agency management knew as early as 2001 that fund reserves were inadequate, management did not aggressively pursue changes to benefits, or the tax structure, in order to prevent the insolvency of the trust fund.”
  • “ESC’s annual assessment reports to the General Assembly did not provide adequate information about the declining trust fund balance. Nor did ESC make recommendations to prevent the trust fund’s decline as required by … the S.C. Code of Laws.”
  • “ESC did not follow (U.S.) Department of Labor (DOL) guidance regarding minimum reserves.” Had the ESC done so, the unemployment fund “would still have a significant surplus.”
  • “Employees who were terminated for misconduct, illegal acts or other offenses have been paid more than $171 million in state unemployment benefits during the last three fiscal years.”
  • “In 2008, ESC stopped referring claimants for criminal prosecution who had fraudulently obtained unemployment benefits. Claimants defrauded the agency out of $7.3 million” in FY08-2009.

 
Examples of people who lost their jobs for a good reason but collected unemployment anyway include, according to the report:

 

  • “An employee made unauthorized charges on his company’s credit card, which included motel rooms, hardware and Internet dating charges. He was terminated by the company, but ESC still allowed him to collect $3,586 in unemployment benefits.”
  • “An employee was discharged for absenteeism due to his incarceration. The commission allowed him to collect $5,868 in unemployment benefits.”
  • “An employee made a job-related threat and alluded to a weapon in his car. Police found a loaded firearm in the employee’s car. He was terminated for cause, but still collected $2,440 in unemployment benefits.”

 
The Audit Council, which functions as the watchdog arm of the Legislature, also found no evidence that top-level ESC managers told their bosses or the Legislature “that state law needed to be changed in order for extended (federal unemployment) benefits to be provided to certain claimants. As a result, the General Assembly had to return in October 2009 (in a special session) to address the issue.”

In addition, the report says the unemployment fund is inequitable to some if not many businesses.

The ESC oversees the fund, which works like an insurance program.

Employers, based on their rates of terminations and layoffs, pay a state tax on each of their workers’ first $7,000 in wages.

That tax revenue goes into what the report describes as each company’s “own ‘unemployment insurance account.’”

However, the way the tax is structured results in some employers with a positive balance in their accounts paying the same amount as others who have a negative balance. “In effect, the negative reserve employers are subsidized by contributions paid by employers with a positive balance,” the report says.

If the ESC were a private insurance company, it could have lost its license to operate in South Carolina as early as 2001 or have been “required to increase its reserves to acceptable levels.”

The list goes on, and the situation is not getting any better.

On Friday, the ESC announced South Carolina’s unemployment rate for December. At 12.6 percent, it set a record for the second consecutive month, rising from 12.3 percent in November, and was fourth highest among the states.

South Carolina’s jobless rate reportedly is forecast to exceed 13 percent this spring.

The escalation is plunging the Palmetto State ever more deeply into debt to the feds to cover its unemployment checks.

The borrowing began in December 2008. By Jan. 15 – little more than a year later – the red ink totaled $723.7 million, according to the U.S. Department of Labor Web site.

Demonstrating the rate of increase, the debt had climbed to nearly $736.2 million by Jan. 21 – a jump of about $12.5 million in a mere six days, or a little more than $2 million per day. To monitor the pileup, surf to http://www.workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans..

For South Carolina, the ESC is a train wreck of epic proportions.

“If the federal loans are not repaid in a timely manner, businesses face higher federal taxes as a result of the loss of a federal tax credit,” the report says. “Also, there are interest charges on the federal loans that cannot be paid, directly or indirectly, from (unemployment insurance) taxes. The state’s first interest payment will be due in September 2011 and is estimated to be $52 million.”

State tax increases and cuts in unemployment benefits also could ensue, according to the Legislative Audit Council report. “This can result in lower economic growth, less job creation and a reduction in consumer demand.”

The General Assembly reconvened for a new legislative session Jan. 12 and proposals to reform the ESC are pending at the State House.

A few days before the session began, Senate President Pro Tempore Glenn McConnell, R-Charleston, told The Nerve that lawmakers will give the ESC a thorough going-over and he thinks there will be “major surgery” at the agency.

Toward that end, if the senator from Charleston is serious about reforming the commission, he could certainly lead the charge.

That’s because the agency is most directly accountable to the Legislature itself.

The ESC is governed by a three-person commission whose members are elected by – surprise – state lawmakers.

In fact, all of the commissioners are former legislators, who now are paid annual salaries topping $100,000 to fill their full-time jobs.

In November, 38-year ESC employee Roosevelt “Ted” Halley stepped down from his job as director of the agency. He was replaced on an interim basis by Samuel R. Foster, a former ESC commissioner who – you guessed it – likewise is a former legislator.

Many business leaders believe the system needs greater oversight.

“There needs to be more accountability from that standpoint,” Ike McLeese, president and CEO of the Greater Columbia Chamber of Commerce, says of the ESC’s governing structure.

McLeese says the Columbia Chamber has endorsed the South Carolina Chamber of Commerce’s proposal for reforming the agency: Make it part of the governor’s cabinet.

That’s the first option the Audit Council report lists for recommendations to overhaul the ESC. “South Carolina’s commission form of management is unique,” it says.

Reach Ward at (803) 779-5022, ext. 117, or eric@scpolicycouncil.com.