The $1.13 billion debt nobody in Minnesota government wants to talk about

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

Just not by all accounts.

The state’s budget is balanced, tax collections suggest it could have a surplus as high as $3 billion by the time of the next official forecast in November, and it has more than $1 billion in unspent American Rescue Plan funds waiting for the Legislature to spend come January.

In fact, all that cash has led Gov. Tim Walz and DFLers in the House and Senate to suggest that a $250 million fund for pandemic worker bonuses could get a lot bigger. “We’re in the position to do what’s right by as many workers as possible,” Walz said this month.

But there is one account that gets 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 in debt Minnesota owes the federal government for covering deficits in the state’s unemployment insurance trust fund. Minnesota is one of just 10 states with outstanding trust fund debt.

While Minnesota’s total is small compared to some bigger states — California owes $19.5 billion — it is large enough to threaten state employers with increases in unemployment insurance taxes once a plan to pay the money back is formulated. And absent a change in state law or a move to pay the debt using something other than rate hikes, state employers could see hikes as high as 14 percent.

“It’s a problem that threatens to hinder our recovery,” said Sen. Eric Pratt, R-Prior Lake, who chairs the Senate Jobs and Economic Growth Committee. 

Borrowing comes with a cost

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

When economies recover, states are allowed to pay back the loans relatively slowly to soften the impact on rates. The last time Minnesota faced a trust fund debt to the feds, during the Great Recession, it put in place a program to repay the $771 million over a number of years.

During the COVID recession, states were responsible for providing regular jobless payments, which surged as layoffs increased. Minnesota lost 416,000 jobs in the spring of 2020 and has regained only 65 percent of them. But the federal government alone paid for enhanced jobless benefits, such as the $600 weekly top off, new payments for gig workers and others not previously part of the system, and the extension of weekly benefits. 

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

The borrowing, however, doesn’t come without a cost. State’s with outstanding debt are charged interest of 2.27 percent, which led four states — Hawaii, Nevada, Ohio and West Virginia — to repay their loans earlier this month. Some have dipped into the money they received in direct payments via the federal American Rescue Plan to repay the loans. 

Steve Grove, the commissioner of the Minnesota Department of Employment and Economic Development (DEED) said last week that “there’s a specific and time-honored process for how a trust fund is paid back.” That includes statutory provisions for how employer taxes can be adjusted to collect enough over time to repay the debt.

“It is specifically designed to take that repayment schedule and pull it out over a long period of time so as to not immediately make life harder on companies when they’re trying to get out of difficult economic times,” Grove said. “We’re confident that we can do that over time.”

Grove also said there are “conversations” with the federal government about repaying loans. “We would be thrilled if the federal government continued to consider additional aid, specifically for this challenge because this system in Minnesota and so many other states really kept our workers afloat during a cataclysmic year and a half for our economy,” he said. 

Yet one request made by the national association of state unemployment agencies was not accepted by the federal government: extending the no-interest policy through 2022.

Of all the federal responses to the pandemic, providing states’ share of jobless benefits could end up being one of the few that will be funded with increased taxes rather than increasing the federal deficit.

Rates likely to rise next year

Two things will soon happen in Minnesota next year, neither of which is welcomed by employers. Absent some federal or state intervention, rates will go up. And the system for assessing employers’ unemployment insurance tax rate, known as “experience rating,” will return. 

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

Starting in January 2022, that freeze will be lifted, and businesses that continue to send former workers into the unemployment system could see their tax rates increase, even beyond the increases needed to repay the debt to the federal government.

Lauryn Schothorst, the director of workplace management and workforce development for the Minnesota Chamber of Commerce, said both state and national business organizations have been asking for relief from impending unemployment tax rate hikes. “The unemployment insurance system is a very critical safety net that was tapped into in unprecedented measures,” she said. “We think businesses should be focusing their resources on making sure they’re staying open, rebuilding and rehiring.” 

Increasing the monthly unemployment insurance rates could make businesses reluctant to hire and slow the recovery. “We think there’s a compelling case to be made that there should be options on the table to address this,” Schothorst said. 

Those options include the interest waiver but also the use of federal relief funds to repay some of the debt. During the regular and special sessions of the Legislature earlier this year, the chamber and other business groups proposed using $600 million of the state’s $2.87 billion in ARP money for repayment.

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

Pratt said that while $600 million was talked about last session, he would prefer to use all of  the unspent ARP money to repay the federal government.

“To take a significant chunk out 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 that.”

Pratt also said he doubts there will be additional relief from the federal government, especially because other states have used the American Rescue Plan allocations to repay borrowing. “It seems clear to me that the feds are saying we’re gonna give you the option. You can either pay us back over time or you can pay us back with these funds,” Pratt said.