CARSON CITY – Gov. Brian Sandoval has proposed spending an estimated $60 million to repay interest on hundreds of millions of dollars in federal loans.
That $60 million would come out of the general fund, said Dale Erquiaga, the governor’s senior adviser. This would leave less money for health care, education and other vital state functions in the general fund.
The state has been borrowing federal money to pay unemployment benefits and now has to repay interest on its loans.
The recession had caused unemployment benefit payouts to quickly outstrip unemployment tax collections, leading Nevada to borrow $645 million from the federal government. Meanwhile, Nevada continues to lead the nation with a 14 percent unemployment rate.
State government was able to defer interest payments last year because of provisions in the American Recovery and Reinvestment Act of 2009. But starting this month, those federal loans begin to accrue interest at a rate of 4 percent, said Mark Mathers, senior deputy state treasurer.
The first bill is due this September.
This leaves the upcoming legislative session as the likely window during which the government will craft a plan to pay its bills.
If the state fails to act, businesses become subject to the Federal Unemployment Tax Act, which levies a 0.3 percent tax on businesses to repay outstanding interest. This tax increases in 0.3 percent increments annually until the interest is paid off.
“You’re basically locked into the federal mechanism for how the advance is retired,” Mathers said.
This would be on top of unemployment taxes that increased from 1.33 percent to 2 percent for most Nevada businesses beginning this year.
The Las Vegas Review-Journal reported that this tax will bring in $410 million in unemployment tax revenue during 2011.
That money can help the unemployment benefits fund back to solvency, but it cannot pay off interest on the state’s debt to the federal government.
In order to pay the interest, lawmakers could authorize a separate, special tax for that purpose. They could also follow state Treasurer Kate Marshall’s idea to levy a bond that would help pay off the interest, thus softening the burden for state businesses.
The governor, however, has promised again and again that he will not increase taxes. Although businesses would become subject to the federal tax in September, the governor said at a press briefing today that he would include the payments in the state’s budget instead.
“I met last fall, immediately after the election, with Sen. (Harry) Reid to have a discussion if we could have some relief on the interest of the unemployment costs,” Sandoval said. “The answer was ‘no.’ So we had built that into our budget.”
Nevada’s unemployment benefits reserves stood at $757.5 million during August, 2008, but the state quickly drained these funds as the recession worsened.
“It went negative when we hit the recession, and we had to pay more benefits than we anticipated,” said Mae Worthey, public information officer with the state’s Department of Employment, Training and Rehabilitation.
The fund currently pays out regular unemployment benefits to 50,000 Nevadans.
As ProPublica has reported throughout this month, 30 states have borrowed more than $40 billion as their obligations to pay unemployment benefits have failed to keep up with revenues.
They reported that the repayment bill is arriving at a particularly bad time as states face a collective $82 billion budget shortfall and continue to have to pay out unemployment benefits on top of the interest.