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Cuts, hikes and borrowing as U.S. states work to pay jobless loans

By Lisa Lambert

WASHINGTON (Reuters) - North Carolina lawmakers next month will begin considering chipping away at aid for the jobless, while squeezing more money from employers, all in the hopes of retiring a debt to the federal government of more than $2 billion.

As unemployment rose during the recession, North Carolina borrowed repeatedly from the U.S. government to pay jobless benefits. It has the third-largest such outstanding loan in the country, $2.4 billion, behind California and New York.

But the state is bucking a trend that has seen states, including Illinois, Pennsylvania and Colorado, issue bonds this year to pay back the federal loan.

"What we want to do is maintain our competitive edge and... get it paid down as quickly as possible," said North Carolina State Senator Bob Rucho, who heads the legislative committee studying the loan.

In September North Carolina paid $84 million in interest and in January federal taxes on employers in the state will go up as part of a mechanism to repay the loan, with businesses charged $63 per employee next year.

In the state's proposed plan, those who are laid off will only collect $350 maximum each week for a total of 20 weeks, as opposed to the current $535 for 26 weeks. All employers, even local governments and non-profits, will pay into the unemployment insurance fund, and the state tax rates will go up.

"If all the parts come together, we'll pay off the debt by 2015," said Rucho, who expects the legislation to pass early next year. "Had we just followed the usual federal plan of paying and paying, it would have been 2019."

States have great latitude in structuring their unemployment insurance systems but the federal government enforces regulations to encourage the programs' solvency and pitches in funds. It also escalates employer taxes in states with outstanding loans to help pay off unemployment debt, adding $21 per employee to employers' bills each year the loan is unpaid.

When the 2007-09 recession hit, many states had enough money to pay benefits, but 36 borrowed from the U.S. government. The government suspended interest on the loans and kept taxes on businesses from rising in its 2009 economic stimulus package.

Last year, though, states had to begin paying millions in interest and some employers saw their tax bills shoot up. The federal government calculates the interest rates using an agglomeration of rates on different Treasury Securities, according to Richard Hobbie, executive director of the National Association of State Workforce Agencies.

A group of states raced to retire their debt in 2012. In January, 28 states had outstanding loans totaling $38.1 billion. As of last week, only 19 states had $26.4 billion outstanding. Many sold bonds to pay off the loans.

"Borrowing in the private sector has been attractive the last couple of years and a number of states have chosen the bonding route and repaid their loans," said Hobbie. "It also buys them time to restructure their programs and helps them avoid federal unemployment tax increases."

Interest rates in the municipal bond market have been scraping record lows, while the interest charged by the U.S. government "tends to be higher than a market rate," Hobbie said.

Idaho, for example, sold bonds that helped cut its borrowing rate to roughly 3 percent from the 4.1 percent it had to pay the U.S. government, according to Loop Capital Markets.

Michigan's sale of $3.32 billion unemployment loans in 2012 was deemed "Deal of the Year," by the leading trade publication for the U.S. municipal bond market, the Bond Buyer.

"The value of it to some extent depends on the size of the transaction," said the managing director of Loop's Analytical Services Division, Christopher Mier, adding a recent Illinois unemployment bond sale attracted many buyers and he expects other states to sell the debt next year. "If you have a small balance, it's not going to be economic."

Still, North Carolina would not find adequate savings by refinancing with bonds, its treasurer determined last month. Bonds would be counted as part of the state's debt load, pushing it up against its borrowing cap, wrote Treasurer Janet Cowell in a letter to lawmakers. She wrote that estimates of savings over the life of the debt range from $100 million to $200 million.

Mier said most states must pass laws authorizing bond sales and that, along with various costs and fees, could deter smaller states from issuing debt.

OVER A DECADE FOR CALIFORNIA REPAYMENT

The biggest debtor - California, which has a $10.1 billion outstanding loan - is also not considering selling bonds. Leaders there have not formulated a method to bring down the mammoth debt, according to the state's nonpartisan Legislative Analyst's Office.

"It's a large deficit to close and it likely would have to be a multi-year process," said the office's fiscal and policy analyst, Eric Harper. "We're pretty constrained."

New York's outstanding balance is about a third of California's, at $3.3 billion.

On its current path, California will pay off its debt some time after 2020. The state borrowed internally to make its interest payments and will have to pay that back as well. This could leave the state's unemployment insurance system shaky when the next recession strikes.

"We really have two issues. We have outstanding loans and we don't have a balanced program yet," said Harper.

(Reporting by Lisa Lambert; Editing by James Dalgleish)

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