S.C.’s Unemployment Train Wreck

January 21, 2010

Investigative Reports

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The NerveA train wreck has been rolling toward South Carolina’s unemployment insurance system for more than a decade, gaining speed each year.

But with every turn of the calendar, instead of heading off the impending disaster, the state agency that manages the system – the Employment Security Commission – and the public body that elects the commission’s governing board – the General Assembly – kicked the can down the road.

Now, that road has led to a railroad crossing where the train wreck is no longer headed this way – it has occurred, and is likely to be documented in full measure in a Legislative Audit Council report slated to be released next week.

For South Carolina taxpayers – mainly businesses – the cost of cleaning up the wreckage has escalated to hundreds of millions of dollars and climbing, possibly to billions.

And, in another sign of business as usual in state government, this mess has the unseemly paw prints of State House politics on it – if not all over it.

Federal and state taxes finance the unemployment insurance system. Employers pay the taxes, which are assessed per worker, and revenue from the state levy goes into a fund that’s used to dole out jobless benefits – the unemployment checks that thousands upon thousands of out-of-work South Carolinians receive weekly.

The Employment Security Commission (ESC) manages the fund.

But somewhere along the line the wheels came off.

The fund “paid out more benefits than it received in contributions in every year since 1998, including during times of relative economic prosperity,” says a report provided to The Nerve by the South Carolina Chamber of Commerce.

For the fund to break even or accumulate a surplus, the state’s jobless rate must be 5 percent or lower, according to Otis Rawl, president and CEO of the state Chamber of Commerce.

But unemployment exceeded 5 percent from 2001 through 2007, a South Carolina Association of Counties chart shows.

Then toward the end of 2007 the “Great Recession” hit, sending the state’s jobless rate skyrocketing to new heights. At 12.3 percent in November, it set a record and, among the states, was tied for third with Nevada and California.

The ESC plans to announce the rate for December on Friday, according to commission spokesman Rodney Welch.

The one-two punch of the declining balance in the unemployment insurance fund and historically high joblessness tapped out the fund. In 2000 it totaled a healthy $782.2 million, the report says. But by December 2008 the fund was in the red and the state began borrowing money from the federal government to cover its unemployment checks.

That indebtedness has been increasing ever since. As of Jan. 15 the Palmetto State was a staggering $723.7 million in hock to the feds for jobless benefits, according to the U.S. Department of Labor Web site.

That number is staring the General Assembly squarely in the face. Lawmakers reconvened Jan. 12 for a new legislative session and proposals to reform the ESC are pending in the Legislature.

In the meantime, the train wreck at the ESC raises many important questions, not least of which are:

  • What will the Legislature do to address it?
  • Whose head(s) – if anybody’s – will roll for it, and when?
  • What happened, and why?

An answer to the latter could be right around the corner with the report by the Legislative Audit Council, which conducts performance-based reviews for the General Assembly.

Sen. Greg Ryberg, R-Aiken, wrote a letter to the Audit Council in January 2009 asking for the probe of the ESC. No fewer than 20 additional lawmakers signed on to the request.

“They asked us to have a report out as soon as possible at the beginning of the (legislative) session,” Audit Council director Tom Bardin says.

Among other components of the ESC report, Bardin says, “We’re going to give a 10-year history of how we got here.”

Senate President Pro Tempore Glenn McConnell, R-Charleston, says change must come to the ESC and it must be game-changing reform. “The Employment Security Commission’s going to get looked over from top to bottom and I think there’s going to be some major surgery there,” McConnell says.

Says Rawl, “We think it should be abolished and (replaced with) a cabinet agency responsible to the governor.”

Rawl estimates that the total tab for cleaning up the mess will be a hefty $2 billion to $2.5 billion when it’s all said and done.

Depending on what the Legislature does, the business community could be on the hook for the state’s debt. Typically, employers receive a credit that covers most of their federal unemployment tax.

But when a state borrows from Uncle Sam for jobless benefits and does not repay the money within two years, the credit begins to decrease by a certain percentage each year, says Allen Larson, who oversees the unemployment fund.

The amount of that reduction, which employers have to make up, automatically goes toward paying off the debt, Larson says.

Thus, South Carolina businesses could be left holding the bag for the ESC debacle in the form of what would amount to a higher federal tax. “There’s no question,” Rawl says.

Moreover, the federal government charges interest on the borrowing.

Under the stimulus act, South Carolina will not be assessed any interest through the end of this year, Larson says.

But the interest meter starts running at the beginning of 2011 and the state must begin repaying its unemployment debt in September of that year. The state’s estimated interest in 2011 will be about $50 million, Larson says.

The interest presents a whole different problem for South Carolina. The principal can be repaid from the unemployment fund. However, Larson says of the interest, “It’s got to come out of something other than the trust fund money.”

Read: the state’s general fund or some other source or combination of sources.

The Palmetto State is not alone in this boat. Including South Carolina, 26 states have borrowed a combined $28.7 billion from the federal government to cover unemployment checks.

Some states have considered issuing bonds to pay off their debt, and hopes linger for more interest waivers and even loan forgiveness by Congress, Larson says.

But in the absence of those possibilities, the ESC train wreck remains squarely in the Legislature’s lap.

The Audit Council report could go a long way toward explaining and pinpointing responsibility for the ESC’s problems, including:

  • A snafu that led to the Legislature convening in October for a special session in which state law was tweaked. The change allowed South Carolina to receive extended federal unemployment benefits that were blocked because the revision had not been made.
  • Questions about the agency’s policies regarding payment of benefits to people who are fired for a good reason or otherwise should not receive unemployment compensation.
  • Reports of computer glitches that delayed some checks and duplicated others.

In November, as the ESC meltdown was reaching a zenith, 38-year ESC employee Roosevelt “Ted” Halley stepped down from his position as director of the agency.

Samuel R. Foster is filling the job on an interim basis. “The commission has hired the state Budget and Control board to help guide them in the selection process” for a new director, an Oct. 15 ESC news release says.

As much as anything, the problems at the ESC could trace to its structure, where the paw prints of State House politics are visible on the fiasco.

The ESC’s governing board is a three-person commission whose members are elected by – surprise surprise – the Legislature.

Even more of a shocker (not): Rather than wonks schooled in government bureaucracy, the commissioners are all former state lawmakers. Their jobs as commissioners are full time with annual salaries exceeding $100,000.

The model applies to Foster as well. A former ESC commissioner, he too was a legislator before he was a commissioner.

Can you say “political patronage system”?

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