We reported back in November on the tremendous progress made by the General Assembly over the last two years to pay off North Carolina’s $2.6 billion debt to the federal government (that’s billion with a “b”).
This staggering amount of red ink accumulated as a result of the state’s badly mismanaged Unemployment Insurance Trust Fund, back when the other party was in charge of state government. The Democrats failed to maintain adequate account balances over the years, driving the solvency of the trust fund to unsafe levels just prior to the onset of the Great Recession. And when the economy tanked, swelling unemployment rolls made a bad situation even worse.
But instead of fixing the underlying problems, the legislature at the time took money from the feds. They put North Carolina taxpayers on the hook for $2.6 billion — the third highest unemployment debt in the nation, just behind California and New York (both of which have far higher populations). Had North Carolina maintained the trust fund in line with the national average from 1990 to 2004, there would have been no solvency issues to address.
In 2010, voters in North Carolina elected a Republican majority to clean up the mess. And last session, a new law did just that — by both fundamentally reforming the state’s unemployment insurance system and setting a plan in motion to not only pay off the $2.6 billion tab, but build-up a one billion dollar reserve fund for future unemployed workers. And unlike in the past, the new law restricts this reserve fund to the direct payment of unemployment benefits. That way, it’s protected from shifty politicians who might be inclined use it for other things — like some were fond of doing with education lottery money. (By the way, that $2.6 billion was in addition to a $2.7 billion deficit under Governor Beverly Perdue.)
With the new Republican majority came tax reform, regulatory reform, and a host of other initiatives that have dramatically improved the overall economic climate in North Carolina. Unemployment is way down — below the national average. That $2.7 billion deficit was fixed without raising taxes. Businesses are expanding. People are moving here in droves.
And all that good news just got even better. It looks like North Carolina is ahead of schedule to pay off that federal credit card. Dale Folwell, assistant secretary of commerce at the Division of Employment Security, says maybe as soon as the next few weeks. Secretary Folwell has also been extremely effective in rooting out fraud and corruption in the bureaucracy.
Problems at DES were legion under the Democrat administration of former Governor Perdue. The U.S. Department of Labor found that on her watch, only 12 percent of folks in North Carolina who were cashing unemployment checks actually qualified for them (yikes!) and an independent investigation found that the DES’s accuracy rate had been one of the worst in the entire nation. The program was plagued by extensive fraud that included an inmate receiving unemployment checks in prison and an employee of the agency itself cashing unemployment checks — at the same time he was collecting a state paycheck.
That’s all changed. Even the agency’s response rate has dramatically improved; the call center now answers 97 percent of its calls — up from an embarrassing low of 3 percent just three years ago.
We looked around to see if anyone was talking about this in the media — because to us, it seems like a pretty big deal. Nothing in the larger papers or on the teevee, but we did come across this informative piece from Glen Flanagan over at the Morganton News-Herald:
Cutting up the credit card:
NC to pay off unemployment debt
“Two years ago, we inherited the most broke and broken system in the United States — well, the third-most broke,” said Dale Folwell, assistant secretary of commerce at the Division of Employment Security. “Financially, we were $2.6 billion in debt, and broken, in that our quality scores were the lowest in the United States for the whole century.”
State officials borrowed from the federal government after North Carolina’s unemployment trust fund ran out in February 2009. The federal funds went to pay for regular unemployment benefits, and the state racked up a debt as high as $2.8 billion.
That debt is on track to be paid off within the next few weeks, Folwell said.
“Collectively, that means for calendar year 2015, North Carolina employers will be paying $280 million less in FUTA — federal unemployment tax — than they did last year,” Folwell said. “There are only two things they can do with that money, basically. They can pocket it and pay tax on it, which benefits public health, public roads and public schools, or they can use it to hire more people, which also helps those three things. It’s a win-win situation and we’re very excited about finally being able to cut up the credit card.”
Rep. Hugh Blackwell echoed that sentiment, emphasizing the impact that extra money could have on employment.
“The point is that the debt is being paid off earlier than we thought, and that is going to reduce costs for employers,” Blackwell said. “The money they were spending to pay for unemployment insurance benefits can instead hopefully be funneled back into investments — both capital and employees.”
Though payments for 2015 will be lower, Folwell stressed that employers won’t see that until 2016 — payments made during this year are for 2014.
State officials tackled these issues at the beginning of 2013 with House Bill 4, which was signed by Gov. Pat McCrory in February of that year, according to the N.C. General Assembly’s website. Sen. Warren Daniel praised the action as responsible leadership.
“Unlike the federal government, our state government is willing to do the tough things we need to do to pay off the debt we owe,” Daniel said. “I hope someday our federal representatives in Congress will follow our lead and start doing the same thing.”
DES also worked to tackle unemployment scams and improve the quality scores of benefit decisions, according to releases from the division.
From April 2013 through November 2014, the DES Tax Department detected 105 fictitious employer schemes through 672 fraudulent unemployment claims. During that time, $2.7 million in fraudulent benefits were paid, and $5.2 million in fraudulent benefits were blocked. The Benefits Integrity Unit is working to recoup the funds incorrectly paid out.
“It was one of the biggest rewrites of unemployment law in the last half a century. It just cleaned up a lot of stuff,” Folwell said. “We want to make sure the people who are entitled to this money get it correctly — whereas in the past, there was an emphasis on getting it out to them quickly. That’s where all the waste, fraud and abuse came in.”
When employers or employees are dissatisfied with unemployment insurance decisions, they have the option of appealing those decisions. DES has a Quality Control unit which conducts audits on a sample of these decisions in accordance to federal rules and guidelines.
Quality scores in the third quarter of 2014 were 70 percent on issues involving the reason for loss of work — termed separation issues — and 75 percent for issues involving ongoing certification, termed nonseparation issues.
That’s up from 12 percent and 46 percent, respectively, for separation and nonseparation issues — which was what the audit in the last quarter of 2012 revealed.
“Our quality has gone up more than any agency in the United States, and our backlogs have gone down,” Folwell said. “Just in one area of our building, the backlogs when I got there were 280 days. As we speak, it’s 32 days.”
Those quality scores show that initial decisions are being made more accurately, Folwell added.
Though DES has made progress with these issues, Folwell said members of the public often misunderstand how unemployment benefits work. Benefits are not funded through taxes paid by individuals, but rather through FUTA, the federal unemployment tax on employers, and SUTA, the state unemployment tax on employers.
Future goals for the division include streamlining paperwork processes and doing more work with digital forms. A majority of DES work currently is handled on physical paper, Folwell said.
“In football terms, we’re in the red zone now — the last 20 yards,” he said. “That’s the hardest and the hottest. That’s why they call it the red zone. We’re going to be expanding the cross matching we do with other state and national agencies, in terms of cutting down on waste, fraud and abuse. We’re trying for the first time in 40 years to update our mainframe computer system, and by doing so, maybe get our agency into a paperless era.”
The Morganton News-Herald serves Burke County, North Carolina. Follow them on Twitter and Facebook. Glen Luke Flanagan, the author of this piece, can be reached at firstname.lastname@example.org or on the telly at 828-432-8941.