State, business at odds over paying $8B federal pandemic loan debt

ALBANY — A lingering $8 billion debt from a federal loan used to cover the cost of unemployment checks during the COVID-19 pandemic is pitting the state’s employers against state government and its taxpayers.

Twenty-eight business groups, including the state Business Council and the Long Island Association, which are among the most politically influential lobbyists in Albany, are appealing to Gov. Kathy Hochul and the State Legislature to have the state pay interest on the debt. They also want the state to pay down the principal in bigger installments to more quickly eliminate the debt.

“This debt results in hundreds of millions in higher federal and state payroll taxes on New York’s private sector employers,” the business groups said. “Since this debt results from state-directed office closings, it makes sense that public funds be used to help address the debt of this otherwise 100% employer-funded program.”

State officials, however, said that means taxpayers would have to foot the bill for unemployment insurance that is, by law, funded by employers for their workers when they are forced from their jobs by layoffs, reductions in the work force, or closures.

“We don’t want any additional costs, and we’ve been giving a lot of support to our businesses,” Hochul said. She continues to ask the Biden administration to waive the interest on the loan because “this was an unexpected occurrence.”

The Senate and Assembly this week released their counterproposals to Hochul's proposed state budget. The legislative leaders want to increase the income tax for the highest earners and for corporations, which could provide revenue for the unemployment insurance debt, both sides of the issue said.

Either way, consumers and taxpayers would likely pay, said Ron Deutsch, director of the New Yorkers for Fiscal Fairness advocacy group. He noted the interest on the unemployment insurance loan is relatively small, about $200 to $300 per year per employee, and employers already have had some pandemic-era loans forgiven.

“I don’t think it will have as much of an impact on hiring as some claimed,” Deutsch said. “I don’t think it’s too burdensome for employers across the state to pay this off … but I don’t think it should come at the cost of public goods and services.”

The problem began in May 2020, when then-Gov. Andrew M. Cuomo was dealing with mounting deaths from COVID-19. Cuomo would, over the next months, order shutdowns of most nonessential businesses as well as schools to suppress spread of the virus. That shut down companies and ancillary businesses such as restaurants and suppliers, causing job losses. During 2020 and 2021, more than 4.7 million New Yorkers lost their jobs.

Those jobless workers turned to the state’s unemployment insurance trust fund. That fund was $2.7 billion when the pandemic hit, which analysts had said already was underfunded. COVID-19 quickly sapped that resource. In 2020 to 2021, the state paid more than $100 billion in employment insurance checks.

The state didn’t charge employers for their required contribution to the unemployment insurance fund from March 2020 through when the pandemic eased and most businesses were reopened, in December 2021.

But to continue paying unemployment benefits to workers without tapping shuttered employers, Cuomo and the State Legislature took a $10 billion advance from the federal government in the form of a loan. New York was one of 35 states that borrowed to keep their unemployment insurance trust fund solvent and provide income to families during the pandemic.

The state received an additional $12.7 billion in pandemic recovery funds through direct grants and aid for hospitals, schools, child care, aid to tenants, small business recovery, utility payments by those who lost their jobs, homeowner relief and more. But that aid wasn’t used to pay off the unemployment insurance loan, as several states did to varying degrees.

Instead, the aid was spent to improve the response by hospitals to pandemics, to help schools continue to teach during the shutdown and to prepare for education during future pandemics, to create more child care slots and to help renters and homeowners keep their homes.

At least 21 states, including California and Connecticut, used general pandemic aid from Washington to pay down interest or principal or to make improvements in their unemployment insurance systems, according to the National Conference of State Legislatures. At least six states paid off their loans with other federal pandemic aid, NCSL stated.

Now, New York State is paying down the principal of the loan spread over several years and has so far sent $1 billion to Washington. Meanwhile, employers pay the interest on the federal loan as required by state law. That interest totaled $162 million last year, spread among all businesses that pay into the unemployment insurance system.

The state Labor Department estimated the surcharge assessed to cover the interest payment is about $27.60 per employee. That surcharge added about 0.23% of employers’ usual cost of unemployment insurance, according to Comptroller Thomas DiNapoli’s office.

Now, the balance of the debt is $8.2 billion. But the Hochul administration is “rapidly” paying down the debt as a priority, the comptroller’s office said.

Hochul’s budget proposal under negotiation with the State Legislature also includes several funds to help businesses continue to recover from the pandemic, including the $1 billion Small Business Recovery Program adopted last year. But employers say that doesn’t make up for their cost of repaying a debt on funding unemployment they didn’t create.

The state was warned this crunch would happen.

Just over a year ago, the fiscally conservative Empire Center think tank projected the debt would result in a “more than $1 billion tax on labor being imposed at a time when employers are struggling to restaff.”

“The federal government showered New York with unrestricted cash it didn't need, and state officials should have used that money to plug the unemployment shortfall that the state had a major hand in creating,” the center’s Ken Girardin told Newsday last week.

In June, a report by the independent Citizens Budget Commission warned lawmakers of the fiscal consequences of not using overall pandemic recovery aid from the federal government to reduce the unemployment insurance deficit.

“We flagged it as a major concern, and quantified that it will probably take until about 2027 before the state is back out of the red,” the CBC’s Patrick Orecki told Newsday.

The CBC said the debt may not be paid until some economists predict the next recession will hit. That exposes what the Citizens Budget Commission said is a years-long problem in properly funding the unemployment insurance Trust Fund, which the group called chronically insolvent.

“New York has a persistent problem here, that our [unemployment insurance] trust was not well-funded entering COVID-19,” Orecki said. “In addition to addressing the current liability, there should be a focus on designing the fund, collections, and benefits,” he said, so that the trust fund “is not so easily overwhelmed in periods of high claims.”

By Michael Gormley

michael.gormley@newsday.com@GormleyAlbany

Michael Gormley has worked for Newsday since 2013, covering state government, politics and issues. He has covered Albany since 2001.