SC unemployment fund will ‘run out of money’ because of coronavirus, official warns
The state’s fund for paying unemployment benefits to out-of-work South Carolinians may go broke due to the economic impact of the coronavirus, potentially requiring a federal loan to meet its obligations by year’s end.
State workforce director Dan Ellzey told state officials on Thursday that despite the account having about $980 million in the bank, the state is now paying out roughly $70 million in unemployment benefits each week. And with no clear end in sight as to when restaurants and businesses that were paying into the account each month will reopen, Ellzey said the trust fund will be drained.
“We’re gonna run out of money,” said Ellzey, the state’s director of the Department of Employment and Workforce.
DEW does not know when the fund will bottom out, according to a spokesperson, who said the agency doesn’t anticipate needing help from the federal government for at least the next three months. But how quickly the fund is depleted depends entirely on how many South Carolinians keep filing for unemployment — which includes people who’ve been furloughed — and what kinds of benefits they are eligible for.
Laid off workers need not worry about whether they will get their checks. Federal law requires states to continue paying out unemployment benefits to eligible claimants, even if the fund runs low. States can request federal loans to help it meet their obligations.
Still, the threat over the quick spread of COVID-19, the sometimes serious respiratory disease caused by the novel coronavirus, has taken a severe hit on the S.C. economy, particularly the state’s tourism industry that produces more than a billion dollars in tax revenue a year and employs tens of thousands of people.
By most pre-pandemic measures, South Carolina’s unemployment fund was doing well. Nearly $1.1 billion was sitting in DEW’s unemployment trust fund by mid-March, about two weeks before Gov. Henry McMaster closed nonessential businesses to foot traffic and ordered restaurants to stop in-house dining.
But since the virus’ outbreak, DEW has averaged more than 70,000 unemployment claims a week in the past five weeks, Ellzey said. The week ending April 18 was the first time the number of new claims took a slight downward turn — a possible sign that the waves of newly unemployed or underemployed people are slowing down.
“Were we ready for this?” Ellzey said. “Well, we thought we were.”
Ellzey’s guess for how South Carolina will need to respond?
“My guess is every state” will need to take out loans, he said.
Lessons in the Great Recession
Before the health crisis essentially shut down the state, pressure on the S.C. unemployment system was low.
The state’s GDP was growing faster than the country’s.
The state’s workforce agency was handling somewhere in the ballpark of 2,000 unemployment claims per week at the beginning of last year. And the state’s unemployment rate hovered at about 2.3%, a historic low for South Carolina which during the recession averaged about 10,000 unemployment claims per week.
“The biggest problem I had for the first 10 months of my job was helping employers find employees,” Ellzey said Thursday at the kick off meeting for Accelerate SC, an advisory group formed by the governor to craft recommendations to help slowly reopen the state’s economy.
It was a success story for South Carolina, that, like most states, found its trust fund and work force decimated in the Great Recession of the late 2000s. Having to rebuild the account then, the state made some reforms and ramped up taxes on employers.
“Those were not pleasant times,” said state Rep. Brian White, an Anderson Republican who formerly chaired the House Ways and Means Committee and who now sits on the Labor, Commerce and Industry Committee. “I hope we don’t have to go through it again.”
The 2008-’09 housing market crash upended the state’s economy, leading to budget cuts and a slash to the state’s overall workforce.
In 2009, at the recession’s peak, DEW paid out $98.6 million in the month of April — less than what the agency paid out in the first two weeks of April this year. In fiscal year 2019, the state paid nearly $160 million in unemployment benefits. The workforce agency now is paying out almost half that amount every week.
Staring at a drained unemployment trust fund a decade ago, the state got a more than $977 million federal loan.
It paid off the loan in 2015.
“This loan payoff is truly a cause for celebration,” said then-Gov. Nikki Haley in a statement. “Restoring solvency to the state’s unemployment trust fund is another step in our state becoming debt free and is quantitative proof that our citizens are finding work, businesses are strengthening our workforce and economy, DEW is cracking down on fraudulent claims and South Carolina is open for business.”
But the economic impacts of COVID-19 could be more pervasive than in other recessions, researchers and data suggest.
Before the outbreak, many states were still recovering from the last financial crash, and now they are under even more pressure, according to William Glasgall with the nonpartisan Volcker Alliance, a nonprofit that studies and promotes effective governance.
The shutdown has caused revenue the state would have otherwise raked in this month to evaporate. All manner of revenue from sales taxes to hospitality, gasoline and personal income taxes, shrunk almost overnight. All the while, expenditures for recovery, as well as demand for public services such as Medicaid, is expected to increase.
“States, they’re getting chopped every which way,” Glasgall said. “So, states have an incentive to borrow. There’s no stigma. It’s part of the deal, but they do have to pay it back.”
South Carolina is in better shape than a decade ago, observers note.
The state has the benefit of being able to borrow interest-free from the federal government. That’s in part because the unemployment fund was adequately funded, and because the state doesn’t have outstanding federal debts, according to federal Department of Labor guidelines.
Most states will need longer term relief, Glasgall said.
Those states will have to figure out how to pay back the federal government, by increasing taxes, making budget cuts, moving money around, selling bonds or tapping into other pools of money entirely, Glasgall said.
”The way claims are going,” Glasgall said, “a lot of these funds are gonna be drained.”
Raising taxes on employers ‘not easy’
State Rep. Bill Sandier, R-Oconee, said he hopes the state will not have to take out another loan to meet the state’s unemployment obligations.
But, “I understood as we started closing down business that this was certainly a sincere possibility,” said Sandifer, chairman of the House Labor, Commerce and Industry Committee, who helped write trust fund reforms after the state’s last recession.
“I’m certainly not happy about, but, at the same time, I’m a realist,” Sandifer added.
The governor also could dip into new federal dollars to help DEW.
President Donald Trump last month signed the federal CARES Act legislation into law, which allocated to the state nearly $2 billion. Some of that money could be used for the trust fund, the Department of Administration said on Thursday.
But it may not be enough to fill the hole.
A decade ago, the state raised tax rates on employers to help make the trust fund solvent.
“It was a very ugly time for employers and everything else,” Rep. White said. “It wasn’t an easy decision to increase the unemployment tax during a recession on employers.”
But over the past few years, as recently as last fall, the state has cut those rates.
“Balancing the requirement to maintain a fiscal safety net while cutting business taxes each year shows that South Carolina is dedicated to making it appealing for companies to do business here so they will continue to create jobs and invest in South Carolinians by expanding opportunities,” McMaster said in a statement last fall.
Acknowledging the difficult decision to raise rates, White said he has always advocated some caution.
“There are bad times. Not all times are good,” White said. “There is a downturn, so we need to be careful about what we’re doing here because we’ve been through this once before. You don’t want your fellow lawmakers to go through this again. It’s not easy — it sure as heck isn’t fun.”
Sandifer said cutting rates then was the right thing to do.
“I certainly don’t think it was a mistake, because based on what we knew at the time we were in a very strong economic position as a state,” Sandifer said. “I think at the time that that was the prudent thing to do. Now, after this is over, we will have to go back and look at that again to determine what those rates should be.”
EDITOR’S NOTE: This story was updated to specify that eligible claimants will keep receiving state unemployment benefits. Federal law requires states to continue paying out unemployment insurance even if their unemployment trust funds run out of money. States are permitted to take out federal loans if needed to meet those financial obligations. (Updated: 3:41 p.m. [04/27/20])
This story was originally published April 26, 2020 at 5:00 AM with the headline "SC unemployment fund will ‘run out of money’ because of coronavirus, official warns."
