Financial analysts say new law won't fix unemployment fund

JEFFERSON CITY, Mo. -- A new law intended to bail out Missouri's insolvent fund for unemployment benefits won't get the job done, according to financial analysts hired by the state.

The reason: A constitutional limit on annual revenue increases may require a statewide vote -- something not contemplated by the law -- in order to impose enough taxes on businesses to fully pay off a proposed bond issuance.

The solution could require a special legislative session to rework the bond terms, according to the state's Chicago-based financial adviser, RBC Dain Rauscher. But the state would have to act quickly, or face the possibility of a multimillion-dollar reduction in the federal tax breaks available to Missouri businesses for paying into the unemployment insurance fund.

'Even a bigger problem'

The bottom line is the new law "does not solve the problem. In fact, it has created maybe even a bigger problem than what we had before," Jim Kistler, executive vice president of the Associated Industries of Missouri, said Friday. The industry group was a lone dissenter as lawmakers overwhelmingly passed the bipartisan bill on the final day of their session in May.

State Rep. Todd Smith, a lead sponsor of the law, said Friday that he would support a September special session to address the concerns of the financial analysts, although he had thought the bill was written to avoid the constitution's tax limit.

"The hope is we can come to an agreement on the language, the governor will call the special session, and we can just slam dunk it through," said Smith, R-Sedalia.

Missouri's unemployment insurance trust fund has been insolvent since early last year. But Missourians have continued to receive jobless benefits, because the federal government has picked up the tab.

Over time, Missouri has accumulated a nearly $289 million debt to the federal government, which is expected to rise by as much as $40 million by the end this year and could grow to as much as $450 million next year.

The federal government charges 6 percent interest on the debt and, if it still outstanding by Jan. 1, will start recouping money by decreasing the federal tax credits available to employers.

The new Missouri law authorizes up to $450 million in state bonds to repay the federal debt. Under the law, the state bonds would have to be paid off by Jan. 15, 2008, through higher surcharges on business. But the bond's estimated interest rate of at 2.5 percent would save businesses money compared to the federal rate.

While good in theory, financial analysts said, the plan has some practical problems.

The Missouri Constitution requires a statewide vote on any new measures that would generate more than $75 million a year. To repay the bonds in three years would require an employer surcharge larger than that threshold. But there is no vote scheduled.

So to keep the surcharge under the cap, the state would have to limit the bond issuance to between $150 million and $200 million -- not enough to repay the full federal debt.

One solution, which could be pursued in a special session, would be to amend the law to extend the maturity date of the bonds.

Like when buying a house or car, a longer repayment period lowers the regular payment, thus lowering the surcharge on businesses and avoiding the potential constitutional problem. However, just as a 30-year home mortgage has a higher interest rate than a 15-year one, a longer maturity date for the bonds also comes with a higher interest rate.

The Missouri Chamber of Commerce and Industry, which supported the legislation, noted the new law also provides other debt options besides bonds. But a debt-repayment method must be settled on sooner rather than later, said Kelly Gillespie, the chamber's vice president of governmental affairs.

"It's going to be far cheaper to continue asking the legislature and our executive leaders to get their hands around this problem now, rather than close their eyes and put it off until next year," he said.