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2 The Virgin Islands Daily News VIRGIN ISLANDS Tuesday, December 13, 2016 V.I. businesses face higher unemployment taxes as territory struggles to pay down $69 million debt By BRIAN O’CONNOR Daily News Staff Territory business owners will pay four times the normal federal unem- ployment tax rate this year because of an unpaid government debt, docu- ments show. The federal unemployment insur- ance tax rate is traditionally 6 per- cent on the first $7,000 an employee makes. However, the federal govern- ment usually offers a credit of 5.4 percent, meaning most employers ac- tually pay about 0.6 percent, accord- ing to the IRS. States — and territories — with unemployment insurance programs meeting federal standards are re- quired to meet their unemployment obligations. When a state can’t meet its unemployment obligations, it’s entitled to take loans from the Fed- eral Unemployment Insurance Trust Fund. Federal documents show only one state and one jurisdiction — Califor- nia and the U.S. Virgin Islands — are currently in that position. The territory owes $69,138,266.61 in loans, according to the U.S. De- partment of Treasury website. In fiscal year 2017, which be- gan Oct. 1, the loans have accrued $294,349.15 in interest payments alone. The VI. Labor Department is in charge of administering unemploy- ment insurance. Labor Commission- er Catherine Hendry did not return a number of phone calls seeking com- ment. Government House spokeswoman Cherie Munchez would not com- ment, saying that Hendry would issue a prepared statement about the debt by Wednesday. Provisions of the Federal Unem- ployment Tax Act stipulate that in states or territories with outstanding balances in the fund, businesses are subject to a credit reduction, which is collected and directed toward the un- paid balance, according to Robert Pa- vosevich, Supervisor of the Actuarial Team in the Office of Unemployment Insurance’s Division of Fiscal and Actuarial Services in the Department of Labor. Virgin Islands business owners will pay the original 0.6 percent, plus an additional 1.8 percent caused by the unpaid balance, for a total of 2.4 percent, Pavosevich said. At the fully discounted rate, an employer would pay $42 for each employee earning $7,000. At the Vir- gin Islands rate, employers will have to pay $168. After two years with an unpaid balance, the discount decreases by 0.3 percent each year until the total discount disappears, Pavosevich said. “It’s capped at 6 percent,” Pavosev- ich said. At the full 6 percent, employers will have to pay $420 for each new employee earning $7,000 that comes on board. By law, that money can’t come out of the wages themselves and is paid out of the profits or losses that employers face, said Charles Engeman, an attorney who served on the Unemployment Insurance Advi- sory Council under the administra- tion of Goy. John deJongh Jr. Without payment on the loan — or waivers or relief, which has happened three times since 2013 — the rate is scheduled to max out by 2028. That’s barring the imposition of step in- creases, which can happen if the state has an outstanding balance for a cer- tain number of years, or if — as was the case in the tax year 2012 — step increases are piled on by other provi- sions of the law, which could move the unemployment tax rate up faster. “Tt looks like they’re not making much headway,” Pavosevich said, re- ferring to the territory’s debt. The territory wasn’t alone in 2011, the first year the rate went up. In all, 20 states and the Virgin Islands re- ceived a 0.3 percent credit reduction that year, federal documents show. That’s in part because of the linger- ing effects of the Great Recession, said Bennett Chan, a lawyer who represents several businesses and has worked with the St. Thomas-St. John Chamber of Commerce in the past. | don’t think there’s enough political willpower to do the kinds of thing necessary to fix the system. — Charles Engeman, an attorney who served on the Unemployment Insurance Advisory Council under the administration of Gov. John deJongh Jr. The business owners always bear the brunt of whatever deficiencies we have. We have to, at some point, find other sources of revenue for the government. Any time there's any sort of additional tax burden, fee burden, licensing burden, it’s always a point of concern. — Kimberly McCollum, president of the St. Croix Chamber of Commerce In general terms, states collected more money than they paid out dur- ing the years leading up to the 2008 market collapse, creating large sur- pluses. Sometimes those surpluses were subject to financial raids. Other times — as was the case in the ter- ritory — the surpluses were used as a cause to reduce the amounts col- lected for unemployment insurance. When large-scale unemployment hit as a result of the recession, surpluses turned into deficits, Chan said. “A lot of states were blindsided by the Great Recession,’ Chan said. “They also had big surpluses and never foresaw that there would be this sudden inflow in unemployment claims.” Territorial officials were late in re- acting to bring the rate back up to ad- dress the issue, Chan said. “Tf we had done it earlier, we prob- ably would have collected enough,” he said. “Now they want to make it up when times are hard.” In many cases, the government can’t say what each employer owes or has paid in surplus, Engeman said. The system originally was set up so that employers faced a roller coaster, Engeman said. Each employer had a rate based on a three-year average. If an em- ployer’s account paid out more in benefits than they contributed, the rate would go up to 5.4 percent. After three years, the employer's rate would drop down to 0.1 percent, because at 5.4 percent, the rate exceeded likely contributions. At 0.1 percent, if anyone were laid off, it immediately moved the em- ployer back to the 5.4 percent rate. Employers would oscillate between the 5.4 percent rate and the 0.1 per- cent rate. “Tt was 5.4 for many employers, and that’s what an average employer would pay out over the course of 17 years for one employee,” Engeman said. As a result, the unemployment insurance fund accumulated large surpluses. To reduce the surpluses, the VI. Labor Department dropped the automatic increase based on a negative account, and lowered the minimum rate to 0. Less money came in, even as unemployment rates re- mained high and benefits remained expensive. A few steps could help move the system back to sound footing, Engeman said. For example, better record-keeping would help reduce delinquencies. Reducing unem- ployment insurance benefits and reducing the amount of time the unemployed are eligible for unem- ployment would both help. Verify- ing that those collecting unemploy- ment are seeking employment, and generally reducing fraud also would help, Engeman said. “T don’t think there’s enough politi- cal willpower to do the kinds of thing necessary to fix the system,” he said. Chamber of Commerce officials on both islands decried any increase in taxes or fees for businesses. “Despite what the governor and the senators think, the economy of the Virgin Islands is not doing that well,” said Tom Brunt III, a member of the St. Thomas-St. John Chamber of Commerce Board of Directors. Kimberly McCollum, president of the St. Croix Chamber of Commerce, said any increases to fees or taxes was worrying. “The business owners always bear the brunt of whatever deficiencies we have,” she said. “We have to, at some point, find other sources of revenue for the government. Any time there’s any sort of additional tax burden, fee burden, licensing burden, it’s always a point of concern.” The folly of the situation is com- pounded by the fact that business owners themselves aren’t allowed to file for unemployment if they lose their jobs, McCollum said. “You're still paying unemployment taxes on what you're paid, but you are not allowed to request compensation should you find yourself in a position to file for unemployment,” she said. — Contact Brian O'Connor at 340-714-9130 or email boconnor@ dailynews.vi. ISSN 2159-3019 Daily News Publishing Co. Inc. owned by VIDN Holdings, LLC publishes The Virgin Islands Daily News daily, except Sunday, Christmas Day and New Year's Day, at 9155 Estate Thomas, Charlotte Amalie, St. Thomas, VI 00802. First class postage paid at Charlotte Amalie, St. Thomas. U.S.V.1 USPS 144-180 POSTMASTER, send Form 3579, Notice of Address Change, to: Circulation Director, Daily News, 9155 Estate Thomas, St. Thomas, VI 00802. 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