North Carolina’s unemployment insurance mess



The Tar Heel State’s unemployment rate exceeds the national average.  Ol’ Bev keeps extending unemployment benefits for the state’s long-term unemployed.  All of this is going on in the wake of payroll tax rate cuts and fewer people drawing paychecks and paying those taxes.  The state is falling deeper in debt — with no solution in sight.  Instead of throwing out ideas to fix this mess, Democrats are hollering about the treatment of Employment Security Commission officials before a legislative committee.

In the absence of ideas on Jones Street, The Raleigh-based John Locke Foundation has tackled the state’s unemployment insurance mess:

The federal government is already imposing increased UI taxes on North Carolina as the default recourse, an additional

0.3 percent on income for each year of delinquency. While the revenue increase of approximately $85 million

in 2012 will not be sufficient to bridge the state UI fiscal gap, the question is over additional taxes, not retention of

current tax levels. (The only ways around this tax increase would be an act of Congress or for the state to repay the

money by borrowing from other sources.)

This federally imposed 0.3 percent tax increase means current employees will automatically pay for past UI benefits

that exceeded the taxes set aside. In other words, earlier taxes, already high relative to neighboring states, and

the trust fund did not warrant the generosity of benefits paid out over the past two years. To raise taxes now, over and

above the federal requirement, would further impose the past fiscal irresponsibility on current workers.

Any additional UI tax increase would increase the cost of labor for employers and discourage them from making

new hires—particularly unwise during a period of high unemployment. In light of this concern, the Small Business

and Entrepreneurship Council identified high UI taxes as a basis for North Carolina’s poor public-policy friendliness.

A tax increase would also be an expansion of the UI system’s transfer that subsidizes abnormal employment

scenarios that tend to rely heavily on employees with high turnover. That includes high-risk and seasonal industries,

among others, and North Carolina is one of 16 states that provide UI benefits to seasonal workers.

Some may be tempted to resolve this problem by taxing specific industries at higher rates or by ruling out all UI

benefits to seasonal workers. Such attempts however, would complicate reporting requirements and open the doors

for reporting fraud, as the U.S. Department of Labor has noticed, not to mention incessant and wasteful lobbying from

trade associations. If people wish to rectify what may be counterproductive spending on seasonal workers, simply

allow workers in those industries to opt out.

Ways Legislators Can Close the Gap

Given the current desperation of North Carolina’s UI trust fund deficit, one might be surprised to learn that it is

poised to get worse. Currently, the federal government is financing the entire EB program for the 80-to-99-week period.

That complete funding runs out on March 6, 2012, however, and it remains precarious.  Typically, states shoulder half

of the cost—in North Carolina that would translate to another $212 million of annual UI payments.

The 1935 UI program, in the middle of the Great Depression, began with benefits at only 16 weeks. Since then

the period of total eligibility, given North Carolina’s level of unemployment, has grown by 519 percent to 99 weeks.

That level of coverage is simply unaffordable in the present context, particularly given that elected officials set aside

nowhere near enough money to justify it.


1. Reject any North Carolina participation in and funding of the 80-to-99-week EB period. That would

not close the shortfall, but it would stop it from getting worse.

Aside from concerns for fiscal responsibility, legislators would find a sympathetic constituency. As the Civitas Institute

measured in May of this year, even when the federal government funded the entire Extended Benefit program,

only 53 percent of registered voters supported the 20-week extension. Presumably, when North Carolina has to pick

up the tab directly, that number would fall well below 50 percent.

2. Cut the number of exclusively state-funded weeks from 26 to 20. Assuming the EB program is rejected,

that would bring the total period of eligibility to 73 weeks (18 months).

South Carolina and Missouri have recently led the way on cutting state-funded weeks. It would save between $230

million and $440 million annually in North Carolina. Alone, that would not be sufficient to repay the debt—unless

one were willing to wait more than twenty years for that to happen. It would, however, balance the UI trust fund shortfall,

halt further federally mandated tax increases, and have a positive impact on the state’s rate of unemployment.30

UI benefits have shown to lengthen periods of unemployment and increase the unemployment rate, and benefit reductions

would dampen that relationship. UI benefits raise the threshold for which the unemployed will accept a new

role. That is to say, people are more likely to turn down an available job and hold out for a better-paid one—to engage

in “excessive search”—so long as they can continue to receive benefits. As noted by the Tax Foundation, approximately

one-third of recipients are able to find work within one week of exhausting UI benefits, while an increase in UI benefits

of 10 percent would tend to raise unemployment durations by 4 to 8 percent.

That may be hard to stomach, given an unemployment rate nationally of 9 percent, and 10 percent in North Carolina.

This relationship between unemployment duration and unemployment benefits is well documented, however, and

even supported by Larry Summers, President Obama’s former director of the National Economic Council.

One good example of the reluctant unemployed made news recently in Asheville, North Carolina, a county with

8 percent unemployment. A flower wholesaler could not find replacements for more than 60 illegal immigrants fired

because of the E-Verify program. “Those who want to work fail to pass E-Verify, and those that pass fail to work,” the

owner shared.

3. Adjust the payment formula to bring North Carolina’s current benefit level into line with South Carolina’s,

from $292 to $239 per week. At very least, bring it into line with North Carolina’s bordering states, which average

$258 per week.

A shift to South Carolina’s level of benefit generosity would save $250 million annually, while a shift to the bordering

states’ average would save $160 million. The more aggressive approach, combined with the tax penalty of 0.3

percent and the restricted week eligibility, would pay off the debt within six years or by the end of the 2017 calendar

year. The less aggressive strategy, simply bringing benefits into line with those of neighboring states, would still pay

off the debt within seven years, before the end of 2018.

The current benefit calculation starts with the recipient’s highest quarter’s worth of wages from the previous year,

so elected officials could adjust it to the average of all four quarters or make it equal to the second lowest quarter.

Alternatively, if that calculation proved insufficient, the entire formula could be redesigned—ideally to an across-theboard

entitlement, in line with a necessities-based income between jobs.

Such an income was the original intention for UI anyway, rather than maintenance of prevailing living standards.

Such a move to uniform benefits would also be in line with employer contributions. Everyone, high- and lowincome

earners alike, pays in at the same rate—at least everyone earning beyond $19,700. So to offer more generous

payments based on higher income is unjustified.

4. Charge interest on benefit repayments where fraud has been found. The federal government has already

mandated an interest penalty of 15 percent, to go into force in October of 2013. And the money must go directly back

into North Carolina’s UI system, rather than any other state fund.

Currently, however, North Carolina does not charge interest penalties at all on UI fraud, and employee and employer

wrongdoing accounts for about 70 percent of overpayments. Also, the Division of Employment Security, while

helpful in the preparation of this report, did not have a metric on how much of this money they manage to reclaim.

The U.S. Department of Labor has made the reduction of improper payments a priority and has provided $50 million

to Georgia, North Carolina, South Carolina, and Tennessee to streamline and harmonize their UI information

systems. That update is due to be complete in 2013 and will assist with enforcement and accuracy.

Labor officials estimate North Carolina’s current fraudulent and unauthorized overpayments at 8.9 percent of the

total, which is below their target of less than 10 percent. If, however, a combination of improved information systems

and stricter enforcement were to halve the overpayment rate—a more ambitious goal—that would save $63 million


5. Lobby the federal government to loosen requirements to help with the UI fund’s financial viability.

Ideally, members of Congress would return this program to state jurisdiction entirely, but in the meantime, there are

many unwarranted mandates that they could rescind painlessly.

One federal requirement, for example, is that beneficiaries be allowed to reject work as strike replacements or in

roles they deem substantially inferior to other jobs in the area. Other than pandering to union support, this requirement

doesn’t appear justified. One-quarter of unemployed individuals reject roles that do not pay at least 10 percent

more than their previous role. Handing out benefits so people can avoid jobs they consider beneath them was never

the intent of the program. […]