While an estimated $3.5 billion state budget deficit has consumed a majority of the debate in the governor’s race, the next administration will also have to come up with a plan to repay close to $1 billion in federal funds that are currently keeping the unemployment insurance trust fund solvent.

In October 2009 the unemployment trust fund went bankrupt and the federal government gave Connecticut a $500 million interest free loan so the state could keep paying out unemployment benefits. The Department of Labor has estimated the state will need to borrow upwards of $860 million before the end of 2011.

Currently there is no plan in place to repay these loans, which fall outside of the state budget process, but House Minority Leader Lawrence Cafero warned in an Oct. 14 letter to Democratic leadership that employers will begin to lose their federal tax credits if these loans remain unpaid.

A bill to increase the unemployment solvency tax on businesses from 1.4 percent to 1.6 percent never made it through the legislative process last year, but it will be something the new governor will need to address.

Asked about how they will tackle the issue, the two candidates, Republican Tom Foley and Democrat Dan Malloy, weren’t too far apart on the issue.

Last week Foley said he didn’t think it would be a good idea to begin increasing the unemployment tax.

“That would be probably not good policy from the point of view of burdening employers,“ Foley said. “We need to be moving in the direction of reducing expenses for employers.“

“The federal government has been assisting and I would guess Congress would probably authorize some continued assistance,” Foley said. “We also don’t want to hurt the economy by raising the unemployment insurance rates in the short term to employers. I would be in favor of waiting before you bring up the insurance rates until the economy is better.“

Malloy said he thinks the federal government should forgive some of these loans.

“First and foremost, I’ll personally go to Washington and argue on behalf of the state that the federal government needs to play larger role in helping states recover from the recession,” Malloy said. “That help should, in part, include considering forgiving certain loans. If Washington saw fit to help banks recover, there is absolutely no reason it shouldn’t help states as they work to provide services to families who are struggling.”

“The help also might come in the form of restructuring payments over a longer period of time. From there, we’ll institute necessary changes to pay the loans as the law requires, and do it in a way that won’t stall economic recovery here in Connecticut,” said Malloy.

Other states that borrowed funds to prop up their unemployment insurance trust funds have begun to address the debt by increasing the unemployment tax rate on businesses or increasing the position of employee wages on which unemployment taxes can be collected. Some states like Pennsylvania have even begun to cut unemployment benefits as unemployment continues to rise, while others like New Hampshire have delayed payments by one week.

The unemployment solvency tax rate for employers in Connecticut is currently at its maximum rate of 1.4 percent. The second unemployment tax employers pay is based on the number of people they’ve laid off.