Treasury Department guidance forbids states from using the funds to offset revenue losses due to the pandemic, limiting what states can do with the funding. This is unfortunate, as West Virginia ended FY 2020 with a $198 million revenue shortfall, and is likely to see more shortfalls in the coming fiscal year as the impact of the COVID-19 crisis continues to be felt.
With those limitations, Governor Justice has chosen to allocate funding to local governments, grants for small businesses, and highway projects, as well as smaller allotments to Fairmont State Hospital, local public service districts, and various state reimbursements. However, the majority of the $1.25 billion in CARES Act funding is going to Workforce West Virginia, in order to replenish the state’s unemployment trust fund system.
While the Treasury Department guidance allows for states to use CARES Act funding to pay unemployment benefits, there are better uses for the money, especially such a significant portion of it.
For starters, state unemployment benefits are paid from a separate, dedicated trust fund that’s financed entirely through employer taxes, while a separate federal unemployment tax funds extended unemployment benefits and federal grants and loans to states. West Virginia’s unemployment tax ranges from 1.5% to 7.5% on the first $12,000 of an employee’s wages, with new employers paying a rate of 2.7%. The federal unemployment tax rate is 6.0% on the first $7,000 of wages.
State unemployment trust funds are not part of the state’s general revenue fund that pays for education, health care, and other fundamental state services. A shortfall in the state’s unemployment trust fund would not result in layoffs and other budget cuts to essential state services that could worsen the recession.
But since unemployment benefits are an entitlement, states are legally required to continue paying benefits, even if the their trust fund is depleted. This is currently happening to states across the country as they deal with a wave of new unemployment claims due to the COVID-19 pandemic.
When a state’s trust fund is depleted, the federal government offers loans to states to continue paying benefits. To apply for a federal loan, the state must submit a letter requesting a loan to the U.S. Labor Secretary. Once the loan is approved, the funds are placed into the state account in monthly increments.
If a state has an outstanding loan, it must pay it back in full by November 10 following the second consecutive January 1 on which the state has the outstanding loan, giving states up to 34 months to repay the loan. If the state does not repay a loan by November 10 of the second year, the state becomes subject to a reduction in the amount of state unemployment tax credit applied against the federal unemployment tax, in effect raising the federal tax rate. Interest also starts to collect if the loan is not paid back on time.
However, under the Families First Coronavirus Response Act, no interest will accrue on the federal loans made to the states from March 18, 2020 through December 31, 2020, and principal repayments don’t begin until November 2022.
In May, West Virginia was approved for a loan of $375 million. At our current unemployment level of roughly 75,000 continued claims, and an average weekly benefit of $242, that $375 million loan would cover 21 weeks of claims, if fully drawn down, giving West Virginia plenty of time to decide if further loans are needed. As of July 6, 2020, West Virginia has an outstanding loan balance of $4.4 million.
West Virginia currently has more urgent needs than avoiding having to repay federal unemployment trust fund loans two years from now, including ensuring schools are safe to open, funding any changes that need to be made in education, increasing testing capacity, providing PPE, and supporting child care infrastructure. The state should maximize its CARES Act funding to meet those needs.
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