Va. to borrow $1.26 billion for depleted unemployment funds

As Virginia wrestles with ways to replenish its depleted fund for unemployment benefits, Hampton Roads employers expressed concern about the impact that higher unemployment taxes could have on the health of their businesses.

The sorts of tax increases described by the Virginia Employment Commission earlier this fall may be difficult for some small businesses to absorb without job cuts, said Jim Shirley, owner of Bennett's Creek Farm Market in Suffolk.

The state's average unemployment tax per employee will jump from $95 this year to $171 in 2010 and to $263 by 2012, the VEC said in a Sept. 29 presentation to the Commission on Unemployment Compensation.

Adjusting to those sorts of increases may require reviewing the number of hours that he keeps his store open, Shirley said. The store, which employs 25, is open seven days a week from 7:30 a.m. to 7 p.m.

Retailers could be hit especially hard by the tax increases because many consumers have clamped down on their spending.

Retailers "are surviving by cutting costs because the sales growth isn't there," said Jeff Miller, president of Miller Oil Co., a Norfolk-based fuel distributor with 38 convenience stores in Virginia and 350 employees.

For small retailers, the financial pressure from weak sales and higher unemployment taxes could be intense, Miller said. "You've got to have someone in the store, and if you're down to one person in the store, you can't cut any more."

In addition to boosting unemployment taxes on employers, Virginia will have to borrow more than $1.26 billion from the federal government in coming years to continue paying jobless benefits, the VEC said in its forecast.

That's because the deficit in its unemployment-benefits fund will hit $194 million by the end of this year and balloon to $561 million by the end of 2010, the VEC said.

The VEC predicted in September that initial claims for jobless benefits would jump 78 percent to 633,931 this year from 356,220 claims in 2008.

The state's unemployment taxes are calculated according to the volume of claims that an employer's workers make on the trust fund and the fund's solvency.

By itself, the increase in unemployment taxes wouldn't be enough for Hustead's Canvas Creations to scale back its work force, said Pat Butler, president of the Norfolk manufacturer of awnings and canvas products. However, the increase may prompt small businesses such as hers to hold off on hiring unless they have additional sales, she said.

"Every time you add people, you look at the total cost of their compensation, including the cost of benefits, insurance and taxes," Butler said.

State Sen. John C. Watkins, R-Powhatan and chairman of the Commission on Unemployment Compensation, said some Virginia employers have already expressed concern about having to pay higher unemployment taxes on top of rising health-insurance premiums and other employee-related expenses.

"They are not happy with what they will have to pay in unemployment taxes, but they knew it was coming," he said.

The General Assembly's eight-member Unemployment Compensation Commission will consider ways to address the trust fund's deficit when it meets in early December, Watkins said.

While up sharply from year-earlier levels, Virginia's jobless rate still compared favorably with the nationwide rate. In October, the state rate stood at 6.6 percent, well below the nationwide rate of 10.2 percent. In the worst-case scenario, Virginia's unemployment rate will peak at 8 percent, the VEC predicted in September.

One reason for the pressure on the unemployment trust fund is the relatively low rate at which the state has taxed employers for coverage of jobless benefits in the past.

For the 12 months through September, the average unemployment tax per employee in Virginia was $93. That was lower than the tax rates in Maryland, North Carolina, South Carolina, West Virginia and Washington, D.C. The average for Virginia was only 37 percent of the nationwide average of $249, according to the VEC.

Two dozen states, including North Carolina, South Carolina, New York and Texas, have already borrowed about $21 billion from the federal government to pay jobless benefits, according to the Labor Department.

One problem with borrowing to pay jobless benefits, the VEC noted, is that interest payments on this debt cannot come from the unemployment trust fund or from federal money. The interest payments on its $1.26 billion of projected borrowing are likely to total $36.7 million and come from general state funds, the VEC said in its September report.

Gov. Timothy M. Kaine contacted the U.S. Treasury Department in September to borrow funds for paying Virginia's jobless benefits during the current quarter. The money "is sitting there for us to draw on," said Don Lillywhite, the VEC's director of labor market information.

The last time Virginia tapped the Treasury to pay jobless benefits was 1983, when it borrowed $45 million. It repaid the loan quickly enough to avoid having to pay interest.

For those who are out of work in Virginia, the maximum jobless benefit is $378 a week, which replaces 43 percent of the state's average weekly wage, according to the VEC.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com