Probable federal loan to cover KY unemployment claims could have long-term impacts

Updated: May. 6, 2020 at 5:56 PM EDT
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LOUISVILLE, Ky. (WAVE) - Hundreds of thousands of Kentuckians are relying on unemployment insurance to make ends meet during the coronavirus pandemic.

But with news that Ohio's unemployment fund has nearly run dry, some believe a similar fate is inevitable in Kentucky.

The governor of Ohio is asking for a $3 billion federal loan to make sure benefits are still paid.

A policy non-profit called the Tax Foundation has projected Kentucky’s fund will run dry without a loan before the end of May.

The number of unemployment claims has put stress on the pool of money, paid through taxed businesses, used to pay unemployment claims called the unemployment insurance trust fund.

“As the numbers come down, I fully expect we will take a federal loan,” Kentucky Gov. Andy Beshear said last week. “Just like we have in the past.”

Beshear said even if the states fund runs dry, and a loan is taken out, benefits will still be paid.

"I'm not going to stop paying benefits simply because we need to get a loan," he said.

But there could still be costs associated with taking out a loan.

A state report shows a loan stemming from the great recession took years to pay back.

So, if that’s the case again, how could that impact Kentucky in the long run?

The Associated Press reports the federal loans, if not paid by November 2022, could lead to higher taxes for businesses in future years to repay the debt of state trust funds.

In addition to that, it’s a setback for Kentucky, which had been working on beefing up the fund after the Great Recession.

Right now, loans to pay unemployment benefits are interest free. But, starting next year, as laws currently stand, the Labor Department could return to how it was operating before the pandemic.

Some states would be able to get interest-free loans, but only if they are in a determined solvent position.

For the state to be eligible to borrow without interest through the U.S. Department of Labor, it needs to have a solvency rate of 1.0 or higher. That means the federal government believes the state is able to pay for benefits for a year in an economic downturn.

The state government of Kentucky hasn’t met that threshold since 1974, according to a 2020 Labor Department report published before the pandemic. So, it may incur interest expenses that 31 other states wont have to pay.

"My commitment isn't just to help everybody who has had to wait too long, but to continue to get the help," Beshear said. "Then, we'll be able to pay it off over time. We'll be able to dig out, but this is a time when people need us the most."

In a blog post, the Pegasus Institute wrote that Kentucky lawmakers have been given numerous opportunities to reform unemployment insurance since the end of the Great Recession, but proposals were never adopted.

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