Impact of Federal Borrowing

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1 Impact of Federal Borrowing Employment Security Council October 2, 2012 David Schmidt Research & Analysis Bureau

2 2 Overview Nevada began borrowing in Money has been borrowed from the federal government to pay regular unemployment benefits. This borrowing affects federal UI taxes, as well as accruing interest. Many states were forced to borrow money, and are now facing similar decisions.

3 3 Historical Context 250% Outstanding Loans as % of Contributions Received % Nevada US Total 150% 100% 50% 0%

4 4 Historical Context 250% Increase in Regular Benefit Payments % 150% 100% 50% 0% US Nevada

5 5 Historical Context 7% 6% 5% 4% 3% 2% 1% 0% Nevada US Total Benefit Cost Rate

6 6 Impact of Borrowing The federal government charges interest at the same rate that it gives states who have a positive trust fund balance rate: % 2012 rate: %

7 7 Impact of Borrowing $40 $35 $30 Borrowing vs. Interest - US Total $1,200 $1,050 $900 billions of dollars $25 $20 $15 $10 $750 $600 $450 $300 millions of dollars $5 $150 $ Balance 2012 Balance 2011 Interest 2012 Interest $0

8 8 FUTA vs. SUTA Taxes FUTA Fixed Wage Base: $7,000 Paid to Federal government Funds federal & state UI administration, Title XII loans Fixed tax rate: 6.0% minus 5.4% credit (0.6% overall) 5.4% credit is gradually reduced in states that have outstanding federal loans. SUTA Indexed Wage Base: $26,900 in 2013 Paid to Nevada Used only to pay benefits, or the principal of loans which were used to pay benefits. Average rate set each year by regulation, currently 2.00%

9 9 Impact of Borrowing The federal government gradually reduces the FUTA credit, raising FUTA taxes on employers in borrowing states at 0.3% per year. Nevada 2011: 0.3% Nevada 2012: 0.6% In 2012, a total of $1.7 billion nationwide was collected through FUTA credit reductions.

10 10 Impact of Borrowing States Facing FUTA Credit Reductions % 0.60% 0.30%

11 11 FUTA Offset Credit Reduction If a state uses Title XII to pay benefits, and has outstanding loans after 2 years, the Federal government begins reducing the FUTA credit. This increases the FUTA tax paid by employers. The longer a state is borrowing, the steeper the credit reduction becomes. All revenue generated by the increased portion of the FUTA tax is applied to the outstanding loan balance.

12 12 Basic Credit Reduction On the second January 1 with outstanding loans, the credit to employers is reduced by 0.3% ($21 per employee). The credit is reduced by an additional 0.3% each subsequent year. In addition to the base reduction there is a potential additional reduction that begins in the fifth year of borrowing.

13 13 FUTA Offset Credit Caps FUTA Offset Reductions can be capped if the state is making adequate progress toward restoring fund solvency The cap is the higher of: A 0.6% credit reduction, or The prior year s credit reduction

14 14 FUTA Offset Credit Caps In order to cap the credit reduction, the state must meet four benchmarks: No state action was taken from October 1 to September 30 which would result in a reduction of the state s unemployment tax effort. No state action was taken from October 1 to September 30 which would result in a net decrease in solvency of the state UI system. The state unemployment tax rate is greater than or equal to the 5-year average benefit cost rate for the 5 prior calendar years. The state s outstanding loans from the Federal government are less than in the third prior year.

15 15 Eliminating FUTA Credit Reductions In order for a state to end the FUTA credit reductions, it must repay all federal loans. States may repay their loans through a variety of mechanisms: Raising state UI taxes Lowering state UI benefits Imposing additional solvency taxes Issuing bonds to shift debt from federal to private sources, since only federal loans trigger FUTA Credit Reductions.

UI Overview and Forecasts

UI Overview and Forecasts Employment Security Council October 2, 2012 David Schmidt Research & Analysis Bureau National Perspective: National Solvency 12/31/2007 2 AHCM