INVESTIGATION: State Borrows Millions from Feds—RI Businesses Stuck with Tab
Thursday, February 16, 2012
The state has missed a deadline for paying back $243 million in loans from the federal government—but it is local businesses that have ended up paying the penalty for being late, GoLocalProv has learned.
The Rhode Island Department of Labor and Training started borrowing millions from the federal government in early 2009 when its unemployment benefits trust fund ran dry. Those loans carried a November 2011 deadline for repayment, which the state failed to meet, according to an official at the Unemployment Services Trust, a national nonprofit which has been monitoring trends across the country.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTNow, businesses here and in 20 other states that still haven’t paid back all of their loans are being slapped with higher federal unemployment taxes.
For Rhode Island businesses, that means they are paying .3 percent more in federal unemployment taxes on the first $7,000 of employee wages, or about $21 per employee. On top of that, the state is charging a new .3 percent tax on businesses to help it pay down the interest on its federal loans. Both tax hikes took effect this year.
Businesses: ‘Death by a Thousand Cuts’
“Doing business in Rhode Island—it’s like being killed by a thousand cuts,” said Bill Kitsilis, whose family owns Angelo’s Palace Pizza in Cumberland. “It’s all these little extra costs of doing business that kill you in the long run.”
Kitsilis said the timing could not be worse for Rhode Island’s 7,000 licensed restaurants and other eateries which are also facing a proposed 2 percent increase in the meals tax from Gov. Lincoln Chafee. Kitsilis had been thinking about opening a second 150-seat restaurant in Warwick or Coventry, but now he is reconsidering those plans.
“Where am I more likely to open up right now—Massachusetts or Rhode Island?” said Kitsilis, a lifelong Rhode Islander. “You got all these increased costs of doing business. It just seems to make sense to invest in Massachusetts even though my heart’s in Rhode Island.”
The current federal unemployment tax rate is 6 percent on the first $7,000 of wages.
Under normal circumstances, businesses that pay their state unemployment taxes on time receive a 5.4 percent credit, making the real rate that they pay .6 percent.
However, in states with outstanding loans, there is less of a tax credit—forcing businesses in those states to pay more in unemployment taxes. For Rhode Island, the credit is being cropped down to 5.1 percent—meaning that they are paying .9 percent, instead of the .6 percent they would owe if they were in the other states that aren't overdue.
For Christopher Tarro, the co-owner of Siena on Federal Hill and in East Greenwich, the increase translates into a $2,000 bill he received a few weeks ago from the firm that handles his payroll. “I was kind of surprised because I had heard nothing about it,” Tarro said. “All of the sudden, I get a pretty substantial bill.”
“Is one $2,000 bill going to break us? Absolutely not. We’ll pay it and move on,” Tarro said.
But then, yesterday, he found out he also owes $8,000 to state coffers because a tax credit on tips had been revoked. It’s when all those seemingly small costs that start to add up, Tarro said, that they take their toll.
“All we’re trying to do is make a livelihood for ourselves and our employees and it just seems that everywhere we go there’s increased costs of doing business,” Tarro said. “You put it all together—they are changing the way you operate.”
Tab for businesses could total $90M
For each additional year that Rhode Island has an outstanding loan balance, local businesses will face another .3 percent hike on the federal unemployment tax. According to the latest estimates, that could continue until 2014, when the total increase would be 1.2 percent. Over the course of a four-year period, Rhode Island businesses would end up shouldering about $90 million of the debt incurred by the state—not counting money the state raises to pay off its interest, according to documents obtained from the state Department of Labor and Training.
But it could be worse, state officials told GoLocalProv this week.
Last year, the General Assembly overhauled the state unemployment benefits system—increasing revenues from employers, to the tune of about $1.5 million annually, and trimming benefits by about $46.5 million, according to state records. Those reforms will restore the state unemployment benefits trust fund to solvency by the end of 2015. Had the state not acted, businesses would have seen increases on the federal taxes for an additional two years, records show. (The state has received national recognition for its reform efforts.)
“The previous mechanisms of borrowing and funding were done under the previous Governor,” said Christine Hunsinger, spokeswoman for Gov. Lincoln Chafee. “The Governor in his budget took steps to accelerate in the solvency of the fund.”
In the meantime, the state has paid back a chunk of what it has borrowed. As of this week, the state had borrowed a total of $438 million from federal sources and returned $195 million of that, leaving the $243 million that is currently outstanding, according to Laura Hart, spokeswoman for the Department of Labor and Training.
What drained the fund
The trust fund the state maintains for unemployment benefits was exhausted by March 2009, according to Bob Langlais, the assistant director for labor market information at the Department of Labor and Training. “The recession is the final straw that broke our backs,” Langlais said.
But the fund was headed to trouble before that, according to Langlais. In 1998, a new state law changed the way businesses pay unemployment benefits. It used to be that benefits were based on a taxable base wage that changed as the average wage in Rhode Island went up: in other words, as wages increased so did the payments. But after 1998, the state moved to a fixed taxable base. (The state reverted back to a flexible wage base last year.)
As a result, millions less flowed into state coffers, saving businesses $750 million over a decade, according to Langlais. Had that change not been made he says the state would not have been forced to take out federal loans. “There was a great savings to employers from 1999,” he said. “Now the bill has come due.”
When the fund reached its breaking point, in March 2009, the state had three options: cut spending or raise taxes in the budget to cover the difference, float a bond, or borrow from the feds. At the time, the federal loans were an especially attractive option because they were interest free, thanks to a provision in the economic stimulus bill, according to Hart, who said the decision to obtain the loans was made by then-Gov. Don Carcieri.
Of course, those loans stopped being interest free in December 2010.
Since then, the state has taken other measures to try to soften the impact on businesses, according to Hart. In addition to the reforms passed last year, she said state officials nixed a third .3 percent tax that would have been automatically triggered on businesses once the state trust fund become insolvent.
‘Let’s be better’
Business owners like Tarro and Kitsilis understand that state may have found itself between a rock and a hard place in 2009, but they say officials still could have done a better job of planning ahead—and keeping businesses in the loop. “We’re in tough economic times. We understand that, but did you talk about how you were going to pay this back or was this the plan?” Kitsilis said.
“Rhode Island’s a good place to live,” Kitsilis added. “Let’s be better and be smart about it.”
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