Michigan Borrows Record $3.3 Billion in Debt to Repay Unemployment Costs
Michigan, whose joblessness led the nation during 2006-09, will issue $3.3 billion of variable-rate bonds -- its largest-ever sale, according to treasury officials -- to repay federal unemployment-benefit loans.
The two-year bonds underwritten by a unit of Citigroup Inc. (C) were selling at a yield of 0.24 percent, said Tom Saxton, deputy state treasurer. That compares with estimated 3 percent interest on federal loans next year, Saxton said. Repaying the U.S. government by Dec. 31 will save as much as $100 million in interest and avoid federal penalties, he said.
“This is a good deal for the employer community,” he said.
The sale through the Michigan Finance Authority closes today. The state joins Texas and Idaho in tapping debt markets to repay unemployment loans after the 18-month recession that ended in June 2009. Michigan’s 9.8 percent jobless rate in November marked the first time in two years it’s been below 10 percent. The national rate for November was 8.6 percent.
Twenty-seven states and the Virgin Islands owed the federal unemployment trust fund a combined $39.3 billion as of Dec. 22, according to the U.S. Department of Labor. California owes the most, $9.7 billion, followed by New York and Michigan.
Michigan chose variable-rate bonds to take advantage of historically low short-term interest rates, Saxton said. He said that will give the state flexibility to convert the borrowing to long-term financing in 2012.
Two-year debt with a AAA rating yields 0.41 percent, compared with the average 2.82 percent since 1992, according to Bloomberg Fair Market data.
Borrowing to Save
Michigan will levy a separate assessment on employers to pay back the bonds. It also will set a higher tax to shore up its unemployment fund, under legislation linked to the debt-sale authorization. Still, businesses will pay less than if the federal loans weren’t retired, said David Jessup, spokesman for the Small Business Association of Michigan.
Saxton said the bonds still await a rating. Citigroup, the nation’s third-largest bank by assets, is providing a letter of credit, he said.
Proceeds from the sale will repay $3.2 billion borrowed beginning in 2006. The money also will reimburse the general fund for $38 million used for interest on federal loans, plus other unemployment costs, Saxton said.
Unemployment benefits paid in Michigan jumped to $1.15 billion in the first quarter of 2009 from $612 million in the last three months of 2008, according to the bond statement. The state paid $331.4 million in the quarter ending Sept. 30.
In August, Idaho borrowed $202.4 million to pay back unemployment loans, said Bob Fick, spokesman for its Labor Department. The sale will save $15 million, Fick said.
The bonds, which employers must repay, will eliminate a federal surcharge next year, he said. Employers in Idaho “are still trying to come out of the recession,” he said.
In November and December 2010, Texas borrowed about $2 billion to reimburse the federal government.
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