LOUISVILLE, Ky. — The trust fund Kentucky relies on to pay unemployment benefits to people who've lost their jobs will likely run out this summer, forcing the commonwealth to borrow money from the federal government when its finances are already in a bind.
With nearly two in five Kentucky workers out of a job because of the coronavirus pandemic, Gov. Andy Beshear says that his administration believes it has enough money in its Unemployment Insurance Trust Fund to last through the spring and at least part of the summer.
He expects that Kentucky will have to take out a loan unless the U.S. government provides more direct assistance. He hasn't specified how much money may be needed.
“In that area, if the federal government doesn’t help us, we’ll borrow from them because I'm committed to helping every Kentuckian to get through this,” he said.
Kentucky took out a $972 million loan to cover unemployment benefits when it zeroed out its trust fund during the Great Recession of 2008-09. The state finished repaying the federal government in 2015.
More: Here's how Kentucky's unemployment benefits are funded
It still was rebuilding its trust fund when the COVID-19 pandemic sparked a massive wave of business closures and a deluge of employee furloughs and layoffs as Beshear and other governors issued orders to limit the spread of virus, which has been linked to the deaths of more than 300 Kentuckians and around 89,000 people nationwide.
Now, Kentucky — where about 36% of the workforce filed for unemployment over the last eight weeks — is on track to have to take out a massive federal loan again, according to Christopher O’Leary, a senior economist at the W.E. Upjohn Institute for Employment Research in Michigan.
States are legally required to pay unemployment benefits to people who are eligible for them, O'Leary confirmed.
"It's something that they are entitled to," he said.
Kentucky may need $1.5 to $2 billion in loans
As of January, Kentucky had about $619 million in its unemployment trust fund, according to a report by the U.S. Department of Labor. Then the pandemic hit America.
O'Leary estimates Kentucky may need to borrow $1.5 billion to $2 billion to cover unemployment benefits between March 2020 and March 2021.
More than 36 million people nationwide have filed unemployment claims over the past two months.
O'Leary said he expects almost all states will have to go into debt to cover their share of such claims, although much of the assistance people get will be funded solely by the U.S. government.
For example, he projects that Michigan — which had about $4.6 billion in its trust fund when the year began — could fall short by between $3 billion and $4 billion.
More: Unemployment funds were in trouble before coronavirus. Now claims are sky high.
However much money Kentucky borrows eventually must be repaid.
University of Kentucky professor of economics Ken Troske indicated the state's main options would be to reduce the benefits it pays out or to bring more money in by raising taxes. And when businesses face higher taxes, he noted that they increase the prices consumers pay.
GOP lead disapproves of tax hikes to repay loans
Kentucky House Speaker David Osborne, one of the Republican-controlled state legislature's top two leaders, cautioned against a tax hike in a statement Thursday.
“With a third of Kentucky’s workforce idled by the governor for more than two months, the state is just weeks away from depleting the unemployment insurance fund," Osborne said. "However, increasing the tax burden would do far more damage than good when employers are struggling to keep their businesses alive."
Borrowing money is an option, he said. When the state took out a federal loan during the last recession, it paid it off early by raising rates on employers and making "structural changes" to the unemployment insurance system.
"This situation is different and will likely require a different approach," he said. “Ultimately, much of the answer lies in how quickly our economy is able to recover, and therefore in the state’s approach to reopening."
The need to pay back the federal government will be another priority the state must weigh as it juggles pension liabilities, public education and other commitments that require funding.
Troske said making those tradeoffs will become more challenging.
Meanwhile, it's unclear how long this pandemic will last or how much time it will take for America's workforce to recover.
"Estimates are we lost all of the job growth we’ve had over the last decade … in two months," Troske said. "And there is a good chance, a reasonable chance, that we’re going to still be facing elevated unemployment rates for an extended period of time."
How this could affect employers
Every state has an unemployment insurance trust fund account, which is used to provide financial assistance to people who are out of work and eligible for benefits.
The Tax Foundation, a Washington, D.C.-based nonprofit, reported that Ohio, West Virginia and seven other states have been approved for federal loans so far because they anticipate their trust funds will be exhausted soon.
And businesses may feel the effect when their state has to pay back the money it borrows and rebuild its trust fund.
"States must repay these advances (with interest starting in 2021), and if they still have outstanding balances after two years, in-state businesses will face higher federal unemployment insurance taxes," a recent report from the Tax Foundation said.
In Kentucky, the state collects taxes from employers every quarter to bolster its trust fund, according to Josh Benton, deputy secretary for the state's Education and Workforce Development Cabinet.
More: Beshear responds to concerns over unemployment, reopening plan, more in new Q&A
After Kentucky borrowed money to cover unemployment claims during the Great Recession, Benton said the state gradually built its trust fund back up through the unemployment insurance tax that employers pay.
Eventually, it relaxed the rates.
"Employers have been enjoying a pretty low tax rate on unemployment insurance for the past several years," Benton said earlier this year.
He described the pandemic as a "shock to the system" economically.
"We want to do everything we can to absorb the shock, so we can keep the trust fund healthy and keep employer tax rates as stable as possible," he said.
But the state government is already in a tight spot financially.
Can the state afford to take on debt?
A recent report by Kentucky's state budget director projected a possible revenue shortfall of up to $495.7 million for the government's general fund during this fiscal year, with steep declines in the first half of the next fiscal year, too.
That could hurt the state's ability to fund vital services, Beshear said in April.
"It's education, it's public safety," he said. "It's so many important programs that are absolutely critical, especially for those that are living paycheck to paycheck, trying to find that break where they can provide more security for their family."
Kentucky also is in the midst of a fiscal crisis in its public pension system, which has been massively underfunded for years.
However, Kentucky Senate President Robert Stivers, R-Manchester, indicated raising taxes is off the table, at least for now, as many companies struggle to stay open.
"A tax raise on businesses would cause many of them to shutter for good," he said via email Thursday. "Due to our current circumstances, everything is at risk. However, borrowing money to pay unemployment claims would put the state at further risk of being unable to fund other obligations like pensions."
Stivers also said the state already is witnessing a negative impact on its credit rating. It has received "unfavorable feedback" from two prominent credit rating agencies.
"It’s evident in the fact that we are seeing a substantial loss in tax revenues as well as increased pension obligations," he explained.
Reporter Alfred Miller contributed to this story. Reach reporter Morgan Watkins: 502-582-4502; mwatkins@courierjournal.com; Twitter: @morganwatkins26. Support strong local journalism by subscribing today: courier-journal4.com/subscribe.
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