By Rea S. Hederman Jr. and Quinn Townsend
In late spring, Alaska will receive its second and final share of federal money from the American Rescue Plan Act (ARPA). With the size of the ARPA package contributing to inflation, policymakers need to make prudent use of these funds. Alaska policymakers should utilize these funds to replenish the Alaska unemployment insurance trust fund to protect Alaska businesses and employees from future economic downturns and tax increases.
In 2021, Congress passed the American Rescue Plan ACT (ARPA), which would give over $500 billion to states and local governments. Alaska’s share is slightly over $1 billion, which it would receive in two payments. Alaska received the first payment in the spring of 2021 and the second payment will be issued in May of 2022.
Guidance from the US Department of the Treasury provides rules for how states can utilize these funds. States can contribute ARPA dollars to the unemployment fund an amount up to the difference of the unemployment fund between January 27, 2020 and May 17, 2021. For Alaska, this amount is almost $200 million.
The January date is pre-pandemic and at a time when many states had a healthy balance in their trust funds as compared to 2021, before the Covid recession had caused a spike in unemployment. States paid out almost $200 billion in unemployment benefits in just two years as a result of the pandemic with Alaska paying out well over $1 billion dollars. As a result, the balance in many unemployment trust funds was either exhausted or greatly depleted before the economic recovery began.
If a state has been rebuilding its unemployment fund since May 17, 2021 then the unemployment fund balance could exceed the January 27, 2020 level with the ARPA contributions. The guidance does not prohibit states from contributing in excess of the pre-pandemic balance level. Alaska deposited $24 million in undesignated CARES Act funding in July 2021, which does not affect the amount Alaska can contribute since it was after May 17, 2021.
However, in January of 2022, Treasury issued its final rule for ARPA which governs how states and localities can utilize ARPA funds. The final rule includes a maintenance of effort restriction on a state’s ability to change unemployment benefits if states do not act before April 1, 2022 to replenish the unemployment trust fund. States will be unable to change or reduce the state’s unemployment benefits through 2024 if a state does not act soon. Treasury indicates that states do not have to transfer funds to the unemployment system by April 1, but instead states need to show Treasury that they intend to use ARPA dollars to rebuild the trust fund.
The April 1 deadline gives states a strong incentive to rebuild the unemployment trust fund by the deadline. A state that misses that deadline will need to balance the maintenance of effort against having a strong unemployment compensation fund balance. Replenishing the trust fund to prevent future emergency federal loans and potential tax increases is still a valuable use of state ARPA dollars even with the added restrictions.
Unemployment Compensation Funds:
States manage their own unemployment compensation system with support and some requirements from the federal government. States collect taxes from businesses; in Alaska, a lesser amount is also paid by employees. These taxes are placed in an unemployment trust fund. Alaska taxes more of a workers’ salary than most other states, which will lead Alaska to have a larger revenue base but at the cost of high taxes on businesses and workers. These funds are used to pay unemployment benefits for eligible workers. In normal economic times, states collect more in taxes than they pay in unemployment benefits, which allows them to grow the balance in the unemployment fund. Prudent states will have a balance that is big enough to pay out benefits during a small recession.
If a state exhausts its unemployment fund, the state borrows money from the federal government to pay unemployment benefits. The state is then required to repay the federal government loan with interest. If a state has not repaid the federal loan on the first of January for two consecutive years, an additional federal tax is imposed on state businesses until the loan is repaid. The size of the federal tax will also increase for each year the loan is not repaid. States will need to either cut spending or raise taxes to repay the federal government loan and interest.
Alaska’s unemployment rate remains high and is in the bottom ten of all states nationally. The downturn in tourism and the volatile energy industry has played a role in keeping unemployment elevated. With Alaska already having an unemployment tax base higher than the national average, the state needs to work hard to prevent even more taxes on Alaska businesses and workers.
Revenue is flowing freely into Alaska with the current high oil prices and the state is on track for a budget surplus. Alaska does not need ARPA funds to cover normal operating costs. Instead, Alaska policymakers can utilize the federal ARPA dollars to strengthen the balance of the unemployment compensation fund by using almost $200 million of the ARPA funds to replenish the state’s unemployment trust fund. Policymakers need to act quickly to signal their intent to utilize these ARPA funds to avoid a federal maintenance of effort.