Pence eyes surplus to pay off federal unemployment loan

State law didn’t provide for an automatic refund to taxpayers when the state’s reserves reached a healthy $2.14 billion at the end of June.

But Gov. Mike Pence is considering dipping into the state’s surplus to give relief to Indiana businesses by paying off a federal unemployment loan this fall.

The Republican governor could choose to use about $250 million of the surplus to pay off the loan by Nov. 9, saving the state’s employers a projected $327 million in penalties in 2016.

The Pence administration and supporters of the plan say it would provide tax relief for job creators and spur the economy. They also note that the money would essentially be a loan to the unemployment insurance trust fund to pay off the federal debt. And then the fund, filled by employer taxes, would pay back the state.

But a public finance expert and the Democrat fiscal leader in the Indiana House question why a surplus generated by all taxpayers would be used just to help business when the state has so many other needs.

State Rep. Greg Porter, an Indianapolis Democrat, said if the state can use the surplus to pay off the federal loan, he hopes Pence will also consider giving money out of the surplus for local roads and preschool education.

“With that surplus,” Porter said, “I think it could help a whole lot of people.”

The $250 million that could be used to pay off the unemployment loan would also be enough to make whole all the school corporations anticipated to lose funding in the new, two-year state budget approved by lawmakers this year, including Indianapolis Public Schools. It also could cover the average salary for 200 Department of Child Services’ family case managers for more than 30 years.

If the state chooses not to quickly pay off the federal loan, the state’s unemployment trust fund is projected to have the ability to pay off the loan itself by May. But Indiana employers would be hit with an increase in the penalty they pay for 2016 — a $126 per employee penalty compared to $105 this year.

Discussion over offering relief for the state’s businesses follows the General Assembly’s moves over the years to make it more difficult for the state’s reserves to reach the threshold that triggers an automatic taxpayer refund.

For the fiscal year ending in June, the state’s reserves would have needed to be $103 million higher to trigger the refund. State law requires the reserves to constitute 12.5 percent of the budget before offering a refund to Hoosiers. Lawmakers also prohibited reserves set aside for K-12 education from counting toward that threshold.

State budget officials say it’s too early to know the exact mechanism the state would use if the decision is made to pay off the unemployment loan – but using the surplus is an option.

Pence has said his administration is exploring paying off the loan to provide “tax relief for job creators.” Doing so would eliminate per employee penalties currently levied on businesses in the state to pay down the federal loan.

“This really is looked at as a tax on hiring. It’s an impediment to putting Hoosiers to work,” said Micah Vincent, director of the state’s Office of Management and Budget on the penalties.

Under the proposal, the unemployment insurance trust fund would borrow from the state to pay the federal government off by Nov. 9. Then the unemployment insurance trust fund, which has improved from the recession and is now structurally sound, would pay off the state loan.

Yet, Patrik Madaras, a lecturer on statistical analysis at Indiana University-Purdue University Indianapolis and a former state workforce development official, questioned if paying off the federal loan is a correct use of the surplus.

“I can understand that the governor would be interested in using the surplus to reduce that so he doesn’t have to increase the taxes on employers and that’s commendable, but again, is that an appropriate use of surplus – taking money generated through tax revenues from taxpaying citizens to address employer obligations,” Madaras asked.

State Rep. Dan Leonard, a Huntington Republican, said he expects the unemployment fund could pay the state back in the first half of 2016.

“We’re not taking taxpayer dollars and giving it to anybody. All we are doing is using some of our funds to avoid a penalty on employers in Indiana,” Leonard said.

The loan dates back to 2008 when the state had to begin borrowing from the federal government to meet unemployment demands as the recession took hold and its unemployment insurance trust fund couldn’t keep up with the need. At the height of the recession, the debt to the federal government soared upward of $2 billion.

If the state were to pay off the loan, small businesses would see a boost, said Mike Heffner, owner of Express Employment Professionals offices in Greenwood and Columbus.

“In a situation where the state is in a surplus, I feel like we should be in a place that the loan should be paid off and paid down. It’s creating a burden that a lot of businesses don’t even realize,” Heffner said.

Call Star reporter Chelsea Schneider at (317) 444-6077. Follow her on Twitter: @indystarchelsea.