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August 19, 2021

Baker proposes $1B unemployment insurance fund cut to unburden employers

Photo | WBJ File Gov. Charlie Baker

Employers would see their long-term obligation to replenish the state's unemployment insurance fund cut by $1 billion under a proposal Gov. Charlie Baker made on Wednesday, suggesting use of a large piece of the state's sizable surplus to reduce the burden on businesses.

Baker filed legislation to spend almost $1.57 billion in surplus tax collections from the budget year that ended July 1 after revenues exceeded expectations for the year by roughly $5 billion.

The surplus, under Baker's proposal, would also allow state government to cancel a planned draw of $1.1 billion from reserves to cover fiscal year 2021 operating expenses, and to deposit another $1.1 billion in capital gains taxes into the "rainy day" fund, pushing its balance to a record $4.63 billion.

Baker recommended using some of the remaining $568 million available to spend to cover union contract agreements, bonuses of up to $2,000 for state employees required to work during the pandemic and 800 new shelter beds for the next year. And he asked the Legislature to reconsider its decision to delay for one year the implementation of a tax deduction for donations to charity.

The governor's plan to offset the cost of the unemployment benefits paid out over the course of the past 16 months due to the COVID-19 pandemic comes as the business community has been pressuring the administration and the Legislature to use federal relief funding to pay down that long-term debt.

While the unemployment rate in Massachusetts ticked down below 5 percent in June, it reached a nation-leading peak above 17 percent at the height of the pandemic, straining the unemployment system and leaving employers on the hook to rebuild the fund used to pay out worker benefits.

Baker and the Legislature devised a plan to borrow up to $7 billion to replenish the unemployment insurance trust fund and spare businesses immediate sharp increases in their rates, but employers would still have to pay that money back over the next 20 years.

"This transfer will reduce the need to borrow funds for COVID-era claims, and thereby reduce the need for future employer assessments," Baker wrote in his filing letter on Wednesday. "Throughout the pandemic, the Legislature and the Administration have worked closely to respond to the unprecedented experience of employers and workers as we navigate through an unfamiliar economic environment and we hope to continue to do so through the expenditure of these funds."

The proposal was welcomed by employers, but organizations representing the business community continued to urge Baker and Democratic lawmakers to also divert some of the state's $5.3 billion in American Rescue Plan Act funding toward unemployment costs as well.

Associated Industries of Massachusetts CEO John Regan called it a "good-faith proposal to begin to pay down the unemployment insurance deficit caused by a public-health emergency beyond the control of employers."

"AIM also advocates for use of federal stimulus money from the American Rescue Plan Act to stabilize the system and allow the economic recovery to continue," Regan said, asking that the administration also grant non-profits that self-insure their UI costs another payment deadline extension until Dec. 31.

More than two dozen business groups and chambers of commerce also wrote a letter to House Speaker Ron Mariano and Senate President Karen Spilka on Wednesday urging them to support the governor's proposal and use additional ARPA funds to help businesses get back on their feet.

"Many of the states' other priorities -- education, health care, transportation, and childcare -- are supported with separate ARPA and CARES aid. Allocating funding for the UI system demonstrates that the state considers its employers a priority too," the letter stated.

Jim Klocke, the CEO of the Massachusetts Nonproft Network, also said "now is the time" to restore the charitable giving tax deduction, which was approved by voters on the ballot in 2000 but has only available for one of the past 21 years.

"The state charitable deduction will create a critical lifeline for nonprofits, especially those that have been operating in the face of significant revenue constraints," Klocke said, estimating that the deduction will be utilized by over 627,000 low- and middle-income donors each year.

Massachusetts Budget and Policy Center President Marie-Frances Rivera, however, said both the charitable deduction and the UI transfer missed the mark in providing relief to the people and businesses who need it most.

"The Governor's proposal is an across-the-board business-bailout rather than one that specifically supports struggling businesses. A $1 billion decision is not one that should be made lightly. Targeted grants and loans -- particularly for communities of color -- can be better and less expensive ways to support businesses that have struggled during the pandemic," Rivera said.
Massachusetts Taxpayers Foundations President Eileen McAnneny said employers would love to see their full UI debt from the pandemic canceled, but surmised that "might not be realistic given competing needs."

"This obviously doesn't address the whole problem but it's more than a good faith effort to try to alleviate some of that burden," McAnneny said. "We think not only will it help small businesses and rightfully socialize the cost of the economic shutdown over the full taxpaying community, but it should help jump start employers."

Before the full scope of the surplus was known, Baker had proposed to spend as much as $900 million on a two-month sales tax holiday as a way to give back to taxpayers who helped keep the economy afloat during the pandemic, but that Democratic leaders dismissed that proposal.

The new plan to close the books on fiscal year 2021 calls for spending $405 million on retroactive and fiscal year 2022 union contract costs, $39 million on rate increases for human service workers, $17 million to support 800 temporary shelter beds and rate increases for providers, and $3 million to accommodate nursing students at Quinsigamond Community College and Worcester State University who were displaced by the closure of Becker College.

The bill also proposes $40 million for one-time bonus payments of up to $2,000 for front-line state workers, $5 million to pilot a supportive housing program for people experiencing homelessness and $20 million to support employees of residential special education schools.

After a $173 million transfer of excess sales tax revenue to the MBTA and School Building Authority, the administration said the remainder of the surplus was needed to cover fiscal 2021 deficiencies of about $300 million and $400 million in federally reimbursable expenses for which the state is still awaiting funding.

On the policy front, Baker proposed to make a number of federal COVID-19 loans and grants, including Paycheck Protection Program (PPP) loans, non-taxable for all Massachusetts recipients, and is seeking the authority for MassHealth - the state's Medicaid program - to directly negotiate rebate agreements for certain medical supplies and other non-drug products.

Just how quickly the Legislature will consider Baker's close-out budget remains to be seen.

Lawmakers are currently on summer recess and plan to return to full lawmaking business after Labor Day, when they will resume hearings focused on how to spend the roughly $5 billion in remaining ARPA funds from the federal government.

The mid-August filing of the budget is the earliest by Baker since fiscal 2018 when he put forward a bill on July 13, according to the Taxpayers Foundations. Over the past four years, the Legislature has taken until mid-October to mid-December to complete its work on a close-out budget.

Comptroller William McNamara needs the close-out budget to be enacted and signed by Baker before he can close the books on fiscal 2021, which is supposed to happen by Oct. 31.

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