Hawaii will need to pay $59 million in interest to cover unemployment

Hawaii continues to borrow from the U.S. Treasury Department to cover island unemployment claims but has not figured out how to cover $59.8 million in interest payments that will come due.

The state already borrowed more than $734 million to cover 10-year-high unemployment claims beginning last year that were largely caused by the COVID-19 pandemic — “and we are still continuing to borrow,” Anne E. Perreira- Eustaquio, director of the state Department of Labor and Industrial Labor Relations, told the House Finance Committee on Tuesday.

The state is not obligated to pay back the principle on the original loan, but owes $20.8 million in interest payments that will be due starting March 15, along with additional interest payments of $39 million due in 2023 because of the ongoing loans, said DLIR spokesman Bill Kunstman.

The interest payments to cover unemployment claims represent just one more money problem — with no easy solution — for a state facing annual budget shortfalls of $1.4 billion in each of the next four years.

“The interest starts accruing as of March 15 and due on Nov. 10, 2022, if we still have an outstanding loan,” Kunstman said.

There is no specific plan on how to cover the costs of paying off the interest, but Kunstman said state officials are considering the possibility of issuing bonds and dipping into the state training and unemployment fund.

House Finance Committee Chairwoman Sylvia Luke asked Perreira-Eustaquio whether the federal government — meaning the Treasury and Department of Labor — had waived Hawaii’s interest payments on the loans.

Perreira-Eustaquio responded, “It’s not forgiven. They just delayed it till March. So we still are going to be on the hook for the interest. So far, chair, we don’t have a method to pay that interest.”

Not paying the interest likely would mean higher federal taxes for Hawaii businesses, which could lose a Federal Unemployment Tax Act, or FUTA, credit and add pressure on state officials to cover the interest payments.

“If we don’t have a loan and we’re otherwise in conformity with the federal government, employers get a 5.4% tax break on their federal taxes,” Kunstman said.

If not, the percentage on taxable wages that employers have to pay increases, he said.

On its website, the Internal Revenue Service says, “A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to UI (unemployment insurance) tax in those states will owe a greater amount of tax. … The standard FUTA tax rate is 6.0% on the first $7,000 of wages. … If a state has outstanding loan balances on January 1 for two consecutive years, and does not repay the full amount of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.”

Out of the initial $734 million loan, Kunstman said the state has repaid more than $43 million, leaving a balance of $691.5 million on the principle.

The payment came from $3.75 million in employer unemployment contributions and over $39 million in federal CARES Act funds for Hawaii COVID-19 relief.