Friday, April 29, 2011

Reform for Unemployment Insurance

With a state unemployment rate of 6.6% and nearly 197,000 Minnesotans out of work, the effective delivery of unemployment insurance (UI) remains a significant issue for many households [1]. Massive layoffs at companies such as Hutchinson Technology and Wells Fargo and the general depression of the national economy has highlighted the financial shortcomings of the UI system, and the need for reform and long-term solvency solutions is apparent.

Current Funding Strategy
Currently, the UI system is financed through a combination of state and federal payroll taxes, which are deposited into separate state and federal trust funds. On the state level, taxes are levied on employers to finance regular UI benefits for unemployed workers, generally up to 26 weeks. The federal tax on employers is used to finance the administration of state UI programs. Since state UI trust funds may run dry when unemployment remains high for long periods, states can borrow from the federal trust fund and repay these loans in later years from employer taxes. If a state does not fully repay its loan within two years, the federal government is required to recoup it by raising federal UI taxes on employers in the state. Ideally, the system should generate enough revenue for states to pay benefits during a recession without being forced to borrow from the federal government or, even worse, cut UI benefits to workers.

The Problem
However, in a joint report recently published by the Center on Budget and Policy Priorities and the National Employment Law Project, it is estimated that 30 states have now exhausted their UI trust funds in the face of high unemployment and are borrowing from the federal government [2]. With an average weekly wage of $355.96, Minnesota has spent over $1.2 million in UI benefits within the last 12 months alone [3]. As of October 2010, the state UI trust fund was running a deficit of $508 million, and Minnesota had taken out nearly $517 million in loans from the federal government [4]. Since then, the state has taken out yet more UI trust fund loans and now owes over $760 million to the federal government [5].

To repay the principal on these loans, federal UI taxes will increase for employers in a number of states this year or in early 2012. Companies in borrowing states can expect to pay between $5 and $7 billion more in federal UI taxes by the end of 2013 and $16 to $24 billion over the next five years [2]. In addition to higher federal UI taxes, employers are also hit by state-levied special assessments, which are used to make the required annual interest payment on loans. In Minnesota, it is projected the state will owe just over $15 million in interest by the end of September of this year [4]. Tasked with the burden of great loans and interest costs, state policymakers will face considerable pressure to cut UI eligibility and benefits; however, large decreases in benefit amounts would exacerbate the shortcomings of a system that can barely meet the needs of those it is currently serving.

A Proposal for Reform
While there have been many attempts at UI reform, one of the most effective solutions may be found in a national legislative proposal announced in February 2011 called the Unemployment Insurance Solvency Act [6]. This bill employs principles of “forward funding,” a strategy that encourages states to build up trust funds during times of economic growth, draw on them during recessions, and replenish them during the subsequent periods of recovery. In addition, it provides relief for states regarding federal loan and interest payments and seeks to provide jobless workers with adequate income, which is the most important consideration in any reform of unemployment insurance (click here to see an overview of the bill and its primary provisions). With the latest economic recession producing large-scale layoffs, longer than average durations of unemployment, and an increasingly scarce job market, improving the fiscal sustainability of UI is essential. It is the hope of this bill to provide jobless workers throughout Minnesota and across the country with the meaningful change that they deserve.

[1] Bureau of Labor Statistics, Economy at a Glance: Minnesota, March 2011
[2] National Employment Law Project, Policy Memo, February 2011
[3] U.S. Department of Labor, Unemployment Insurance Data Summary, 2011
[4] National Employment Law Project, Unemployment Insurance Solvency: Key Measures, November 2010
[5] National Conference of State Legislatures, Unemployment Insurance: State Trust Fund Loans, April 2011
[6] Unemployment Insurance Solvency Act of 2011, Briefing Memo, April 2011

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