HARRISBURG, Pa.—After several years of stalled efforts, state lawmakers are finalizing legislation to borrow billions of dollars to pay off an unemployment compensation debt owed by businesses to the federal government left over from the huge wave of jobs lost in the recession.

Under the Republican-penned bill, passed by the Senate on Tuesday, businesses would still pay off the debt, but at a lower interest rate available from the private market. Still, the massive amount of the borrowing allowed under the bill—$4.5 billion—could possibly become one of the largest single debt-issuances in the state's history, if not the largest.

"There are better rates through bonding than there is being charged by the federal government through interest," said the bill's sponsor, Sen. John Gordner, R-Columbia. "So if we do a bond issue we end saving our employers money."

The portion of the bill that drew opposition from Democrats and labor unions include changes to eligibility designed to save hundreds of millions of dollars a year. One key change, sought by the administration of Gov. Tom Corbett, would tighten a provision that currently allows jobless benefits for nearly 50,000 people a year who make more than half of their annual income in the space of several months.

"The way this legislation is structured, it is a significant advantage to the business community and industry as we go forward, to the detriment and quite frankly on the backs of those individuals who work here in this commonwealth," said Senate Minority Leader Jay Costa, D-Allegheny.

Republicans also rejected attempts by Democrats to amend the bill to require the borrowing to get approval first from the state auditor general or state treasurer—as is required in a state general obligation bond issue.

"We felt it was extremely important for a variety of reasons—openness, transparency—and to make certain that other folks who sign off on bonds today do the same thing in this particular fashion," Costa said.

The bill was expected to get speedy approval on Wednesday from the GOP-controlled House before it goes to the desk of Corbett for his signature.

The Senate vote, 29-19, was largely along partisan lines, with one Republican opposing it and two Democrats supporting it. Business groups also support it, and employers stand to save about $175 million to $200 million because the interest on the bonds would be less expensive than the interest on the federal debt.

The state Department of Labor and Industry estimates that Pennsylvania's unemployment compensation debt is effectively nearly $4 billion.

With unemployment driven up by the recession, Pennsylvania and other states emptied their unemployment compensation trust funds and began borrowing from the federal government. One of the hardest-hit states, Michigan, sold $3.3 billion in bonds in late December to pay off its debt.

Part of Pennsylvania's problem was that the tax structure that underwrites the trust fund has not been increased by state lawmakers since the 1980s, even though the workers' salaries that determine the amount of benefits have risen steadily.

Under the bill, the Pennsylvania Economic Development Financing Authority could issue up to $4.5 billion in bonds to pay off the debt after the state Department of Labor and Industry applies for it. The bonds would be repaid by money from the debt payments that employers would no longer have to send to the federal government. That amount is $354 million this year, rising by $110 million a year, Gordner said.

The debt should be paid off in 2019, he said.

Meanwhile, the plan also would extract about $350 million in annual savings by narrowing eligibility for jobless benefits. One key change would account for most of that—$276 million—by eliminating eligibility for people, such as seasonal workers, who make a majority of their annual income over several months.

The new rule would require someone to earn 49.5 percent of their base-year wages outside their highest-earning quarter. Currently the law allows as little as 20 percent. That change would ensure that, over the course of a year, approximately 48,000 fewer people would be eligible for jobless benefits, according to the state Department of Labor and Industry. 

"I don't think that's an outrageous requirement at all," Gordner said. "And 90 percent of the claimants that currently are eligible for unemployment will not be affected by this proposal."