The $ 1.13 billion debt that no one in the Minnesota government wants to talk about

By most accounts, the state of Minnesota is in great financial shape.

But not everyone agrees.

The state budget is balanced, tax revenues suggest it could have a surplus of up to $ 3 billion by the next official forecast in November, and it has over $ 1 billion in government funds. US bailout pending legislature spending. January.

In fact, all of that money led Gov. Tim Walz and DFLers in the House and Senate to suggest that a $ 250 million pandemic workers’ bonus fund could get much bigger. “We are able to do what’s right for as many workers as possible,” Walz said this month.

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But there is one account that attracts less attention – one that has implications for the state’s financial health and that will compete for some of those unspent ARP funds: the $ 1.13 billion debt that Minnesota owes the federal government to cover the state’s unemployment insurance trust deficits. funds. Minnesota is one of 10 states with outstanding trust fund debt.

While Minnesota’s total is small compared to some larger states – California owes $ 19.5 billion – it is big enough to threaten state employers to raise taxes on UI once it hits. ‘a repayment plan is formulated. And in the absence of a change in state law or a decision to pay off the debt using something other than rate hikes, state employers could see hikes of up to 14%.

“This is a problem that threatens to hamper our recovery,” said Senator Eric Pratt, R-Prior Lake, who chairs the Senate Committee on Jobs and Economic Growth.

Borrowing at a cost

Borrowing from the federal government during a recession is a normal function of the federal state unemployment benefit system. States are expected to run into surpluses during good times – Minnesota’s was $ 1.5 billion before the pandemic – knowing they can get help if those surpluses run out.

MinnPost photo by Peter Callaghan

State Senator Eric Pratt

When economies recover, states are allowed to repay loans relatively slowly to lessen the impact on rates. The last time Minnesota faced a trust fund debt to the federal government, during the Great Recession, it put in place a program to repay the $ 771 million over several years.

During the COVID recession, states were responsible for providing regular unemployment benefits, which increased as layoffs increased. Minnesota lost 416,000 jobs in the spring of 2020 and only recovered 65%. But the federal government single-handedly paid for improved unemployment benefits, such as the weekly supplement of $ 600, new payments for concert workers and others who were not previously part of the system, and the extension of benefits. weekly allowances.

In total, Minnesota estimates that of the $ 9.5 billion that poured in to unemployed residents, $ 2.4 billion came from the state and more than $ 7 billion came from federally-covered pandemic-related increases.

Borrowing, however, is not without cost. States with unpaid debt are charged interest at 2.27%, which led four states – Hawaii, Nevada, Ohio and West Virginia – to repay their loans earlier this month. Some have used the money they received in direct payments through the US federal bailout to repay the loans.

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Steve Grove, the Minnesota Department of Employment and Economic Development (DEED) commissioner said last week that “there is a specific and time-consuming process for the repayment of a trust fund.” This includes legal provisions on how employers’ taxes can be adjusted to collect enough over time to pay off the debt.

“It is specifically designed to take that repayment schedule and extend it over a long period of time so that it doesn’t immediately make life more difficult for businesses when trying to get out of tough economic times,” Grove said. “We are confident that we can do it over time. “

Commissioner Steve Grove

Commissioner Steve Grove

Grove also said there were “conversations” with the federal government over loan repayment. “We would be delighted if the federal government continued to consider further assistance, especially for this challenge, because this system in Minnesota and so many other states has really kept our workers afloat for a cataclysmic year and a half for our economy. “, did he declare.

However, a request made by the national association of state unemployment agencies has not been accepted by the federal government: extension of the non-interest policy until 2022.

Of all the federal responses to the pandemic, providing states with the share of unemployment benefits could end up being one of the few that is funded by a tax increase rather than an increase in the federal deficit.

Rates are expected to rise next year

Two things will happen soon in Minnesota next year, neither of which is welcomed by employers. In the absence of federal or state intervention, rates will increase. And the Employer Unemployment Insurance Tax Rate Rating System, known as the “Experience Rating,” will be back.

Under experience pricing, industries that use the unemployment system more pay higher rates, while those that rarely have workers in the system pay less. At the start of the recession, the state froze these rates, which was especially helpful for businesses like restaurants and other hospitality employers who laid off many of their workers.

As of January 2022, this freeze will be lifted and companies that continue to send former workers into the unemployment system could see their tax rates rise, even beyond the increases needed to pay down federal government debt. .

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Lauryn Schothorst, director of workplace management and workforce development at the Minnesota Chamber of Commerce, said state and national business organizations are calling for relief from impending tax rate hikes in the Minnesota. unemployment. “The unemployment insurance system is a very critical safety net that has been exploited by unprecedented measures,” she said. “We believe companies should focus their resources to ensure they stay open, rebuild and rehire. ”

Lauryn Schothorst

Lauryn Schothorst

Rising monthly unemployment insurance rates could make businesses reluctant to hire and slow the recovery. “We believe there are compelling arguments to be made that there should be options on the table to resolve this issue,” Schothorst said.

These options include the interest relief but also the use of federal relief funds to pay off part of the debt. During regular and special sessions of the Legislative Assembly earlier this year, the chamber and other business groups proposed to use $ 600 million of the $ 2.87 billion in ARP for repayment .

While that did not happen, the Governor and the Legislature have set aside just under $ 1 billion in federal funds to be allocated during the 2022 session that begins in January.

Pratt said that even though $ 600 million was raised in the last session, he would prefer to use all the unspent ARP money to reimburse the federal government.

“Removing a significant portion of the trust fund deficit would be good for the Minnesota economy,” Pratt said. “It would help employers feel good about going out and hiring people and it would help them with their cash flow.”

But he also said: “Politically, I don’t see the House going for this.”

Pratt also said he doubts there will be further relief from the federal government, especially because other states have used US bailout allocations to repay their loans. “It seems clear to me that the federal government is saying we’re going to give you the option. You can either pay us back over time or pay us back with those funds, ”Pratt said.

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