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Pennsylvania anticipates September unemployment bond issuanceCommonwealth owes approximately $3.9 billion to federal government

- Last modified: July 13, 2012 at 9:46 AM

Pennsylvania is expected to go to the bond market in late September to borrow up to $4.5 billion to pay off about $3.9 billion it owes the federal trust fund to cover unemployment benefits during the recession.

In June, Gov. Tom Corbett signed a bill that allows for the issuance with hopes of getting the state's unemployment compensation fund solvent by 2019.

This move is one that other states — Texas, Idaho and Michigan — have already made. Illinois could be next.

"It's like refinancing your home. It's very similar, but much bigger and more complicated," said Anand Kesavan, senior vice president and head of financial products for Siebert Brandford Shank & Co., one of the nation's leading government finance firms with co-headquarters in New York City and Oakland, Calif.

Kesavan, a specialist in unemployment refinancing, said he expects many other states to follow Pennsylvania as they look to pay off outstanding loans to the federal unemployment account.

The balance of those debts is more than $29.6 billion, according to the U.S. Department of Labor.

Compounding this debt is an annual federal interest tax on employers of 0.3 percent for states that have not yet repaid their outstanding loan advance. The tax makes it incrementally more expensive to do business in those states, which is prompting the bond issuance, Kesavan said.

"Other waiting states will quickly follow suit," he said, calling it "wishful thinking" to assume there will be a major economic recovery before that tax really stunts employers.

The process

After the governor signed the unemployment compensation legislation, a request for qualifications was issued to find a bond underwriter.

More than 100 responses have been received from investment banking firms, said Theresa Elliott, a spokeswoman for the state Department of Community and Economic Development. Those responses are being reviewed.

The Pennsylvania Economic Development Financing Authority would issue the bonds to refinance the loans.

"We'd expect pretty strong interest," Kesavan said. "There is a lot of money sitting on the sidelines because of people worried about investing in stocks and U.S. Treasuries. People are clamoring for any yield."

Through the bond issue, Pennsylvania does not take on new debt. The debt will be paid through employers who pay state unemployment compensation taxes.

The lower fixed interest rate on the bonds — expected to be around 2 percent, according to Julia Hearthway, secretary of the state Department of Labor and Industry — could save employers about $175 million to $200 million.

Employers are on the hook for about $354 million this year because of the debt. That total includes

$110 million added when the federal unemployment compensation tax credit for employers was reduced in January.

Workers who made 50.5 percent of their annual income or more in one quarter would no longer be eligible for benefits under the new law — a change from the current 63 percent limit. The maximum weekly benefit has been frozen at $573 through 2019.

The eligibility change is one of the biggest fixes in the reform. It is expected to affect less than 10 percent of the unemployed and save the system $276 million annually, state officials said.

"This is a package that is not painless, but I think we minimized that and paved the way for Pennsylvania in a way that other states have not," Hearthway said in a news conference after the governor signed the bill. "If we did not fix this problem, we were going to have fewer people employed."

The Pennsylvania bonds would be viewed as a strong investment because they are backed by an employer assessment, Kesavan said. Going to the bond market was probably the commonwealth's best option, given the size of the debt, he added.

The alternative: Drastic changes to the unemployment program, which would have meant significant benefit cuts or outright restructuring.

"You're not just patching some holes. This is not a short-term fix," Kesavan said. "This is trying a holistic solvency restructuring. Investors like to see that, too."

It is anticipated the bonds will be delivered on or about Sept. 28, according to the state's RFQ.

Click here to view the state's RFQ.

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