Unemployment Insurance Overview

Unemployment Compensation: Overview and Current Issues 1 Unemployment Insurance Overview o New Deal program established in 1935 as part of the Social Security Act o Purpose Alleviate hardship of unemployment Countercyclical economic aid for local economies Reduce number of layoffs 2 1

Unemployment Insurance Overview o Who s eligible? Unemployed Ohioans who: Lost their job through no fault of their own Are able to, available for, and actively seeking work Worked at least 20 weeks in the last 12 months for a qualified employer Earned at least $233 (2014 level) per week during that time 3 Unemployment Insurance Overview o Financed solely by employers Federal tax covers program administration State tax covers benefit payments o No General Revenue Funds are used to pay benefits 4 2

Unemployment Insurance Overview What do they receive? o No more than 50% of their previous weekly wage, up to a maximum of: $418 for an individual with no dependents $507 for an individual with one or two dependents $564 for an individual with three or more dependents o Benefits are authorized weekly. A claimant must meet the eligibility requirements in the week for which a payment is issued. 5 Unemployment Insurance Overview Ohio s unemployment system is structurally out of balance: An employer s tax rate rises and falls depending on its experience rating, but the taxable wage base is constant. Unlike the benefit, there is no link to inflation. Ohio s unemployment benefits are statutorily indexed to wage growth and typically increase frequently. 6 3

Tracking the Imbalance Over Time 3,000,000 2,500,000 UI Contributions Deposited & Regular UI Benefits Paid Ohio: CY 1985-2012 2,000,000 1,500,000 1,000,000 500,000 0 Contributions Deposited Benefits Paid Linear (Contributions Deposited) Linear (Benefits Paid) 7 Unemployment Insurance Overview Federal Borrowing: o Through the last recession, Ohio and 36 states borrowed in excess of $130.3 billion o Ohio has borrowed a total of $3.4 billion o Current balance owed is $1.38 billion Repayment is a priority: o We repaid $500 million in principle in 2011 and 2012, more than $250 million in 2013, and another $100 million so far this year 8 4

Unemployment Insurance Overview Federal Role: o Establish minimum national standards o Provide adequate administrative funding to states State Role: o Enact state law congruent with federal standards o Collect taxes and remit to federal trust funds o Timely determinations of eligibility and benefit payment o Collect overpayments 9 Unemployment Insurance Overview FUTA Federal Unemployment Tax Act: o Primarily funds states administrative costs to operate their unemployment programs; o Employers are taxed 6.0% of the first $7,000 of wages paid to each covered employee on their payroll; o If state has good credit 5.4% offsetting tax credit; Net Cost to Employers = 0.6 % o Taxes are paid annually with federal tax filing o The annual value of the offset credit to Ohio s employers is around $1.7 billion. 10 5

FUTA Offset Credit Reduction Years After First Advance Aggregate Cost to Ohio Employers Total per Employee Additional Cost per Employee Effective Base FUTA Tax 0.6% $42 Minimum Reduction 0.3% 2 $93,000,000 $63 $21 0.6% 3 $187,000,000 $84 $42 0.9% 4 $282,000,000 $105 $63 1.2% 5 $377,000,000 $126 $84 1.5% 6 $472,000,000 $147 $105 The 2014 FUTA rate is 6.0%. The full FUTA credit is 5.4% in 2014. 11 FUTA Credit Reduction FUTA tax rate paid by Ohio employers for calendar year 2013: Jan. 1-Dec. 31, 2013 o FUTA tax rate 6.0% o Federal Credit -5.4% o Net FUTA Tax.6% o FUTA Credit Reduction +.9% o Total Effective FUTA Tax 1.5% 12 6

How UC Is Funded SUTA State Unemployment Tax Act: o Paid quarterly by employers to the ODJFS Office of Unemployment Compensation (UC); deposited in UC Trust Fund. o Funds in this state trust fund may be used only to finance Ohio unemployment benefits. No staff costs are charged to the state trust fund. o The taxable wage base for SUTA is the first $9,000 of an employee s annual wages. ODJFS calculates each employer s contribution (tax) rate annually. 13 Basic Requirements for SUTA Rates o Experience rating o Should accumulate reserves during low unemployment periods o Must utilize a taxable wage base no less than that used for FUTA o Beyond the basic requirements, states have a great deal of flexibility to determine weekly benefit amounts, number of weeks compensated 14 7

Ohio SUTA Tax 1984-2014 (Per Employee) 400 350 300 250 200 150 100 50 0 Tax per Employee 336 342 312 315 288 280 288 270 270 270 240 231 216 238 245 243 243 243 252 207 192 192 198 207 153 144 135 144 158 131 131 *The tax collected per employee returned to roughly the same level that it reached in 1984 following the last major recession when using nominal dollars. However, when recalculating using 1984 dollars, a tax of more than $750 per employee would be required for equivalence in 2011. 15 Total Employer Tax Load: Big Picture $600 Average Tax per Employee $500 $400 $300 $200 $100 $56 $56 $198 $207 $56 $56 $56 $56 $56 $243 $243 $252 $270 $288 $74 $84 $342 $315 $105 $224 $252 $270 $270 $270 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Avg SUTA per Employee Avg FUTA per Employee 16 8

State Unemployment Tax o Rates will range from 0.3% to 8.5%, compared to 2012, when they ranged from 0.7% to 9.1%. o Average tax rate for 2014 will decline to 2.8%, compared to 3.5% in 2012 o Average tax per employee will decrease to $256 from $268 17 State Unemployment Tax Components o o o o Base Rate The base rate is the largest portion of the tax. It is fixed in statute and varies each year based on experience factors. These include the size of the employer s payroll, how much the employer has paid in taxes, and how much its account has been charged for benefits. Base rates range from.1 to 6.5 percent. Minimum Safe Level (MSL) Tax The rate schedule is adjusted each year based on the trust fund balance. The tax rate ranges from.2 to 2.0 percent based on an employer s experience rating. Mutualized Rate A flat rate used to cover benefits that cannot be assigned to a specific employer for example, benefits owed to former employees of businesses that have closed. In 2012 the mutualized tax rate was 0.4 percent. No mutualized tax will be levied in 2014, and none is expected for many years. Base Rate + MSL Rate + Mutualized Rate = Employer SUTA Tax Rate 18 9

Minimum Safe Level o Each state determines its own definition of an adequate reserve o Ohio law calls the adequate reserve the Minimum Safe Level, which is essentially the amount of funds needed to sustain the trust fund through a historically typical recession without borrowing o The current MSL is $2,618,762,606.41 o The highest trust fund balance that we have ever 19 achieved is $2.53 billion. Experience Rated Tax System o Two Primary Factors: Employer Claim History and Trust Fund Balance Minimum Safe Base Rate Final Rate Level Tax 6.5 5.7 4.8 4.0 3.3 2.5 1.6.9.1 8.5 7.5 6.3 5.3 4.4 3.4 2.2 1.4.3 2.0 1.8 1.5 1.3 1.1.9.6.5.2 20 10

Employer Overview o All SUTA taxes are paid by Ohio employers o Ohio currently has 221,000 active employers in the UC tax system and another 5,000 reimbursing employers. o 71% of Ohio employers have 20 or fewer employees. o Only 2% of Ohio employers have more than 200 employees, but these employers collectively employ 56% of the total employees in covered 21 employment. Tax Rate Variances o Minimum rate for 2014 remained at.3% o 24% of experience-rated employers are at the minimum rate o Only 6.8% of experience-rated employers are at the maximum rate o 5.8% of employers experienced 2014 rate increases > 100% 22 11

A Tale of Three Employers - #1 o Manufacturer with 580 employees o Total Payroll = $66.9M o Taxable Payroll = $8.35M o Year s Benefit Charges = $3.2M o Account Balance = -$22M o SUTA Tax rate = 8.4% o SUTA Taxes = $701K o FUTA Base Tax = $39K o FUTA Add-on = $78K o FUTA Add-on as % of Total Taxes = 9.5% Percentage of Total Unemployment Taxes FUTA Base Tax 5% FUTA Add-on 9 SUTA Taxes 86% SUTA Taxes FUTA Base Tax FUTA Add-on 23 A Tale of Three Employers - #2 o Retail Fast Food employer with 80 employees o Total Payroll = $1.25M o Taxable Payroll = $772K o Year s Benefit Charges = $9.5K o Account Balance = +46.9K o SUTA Tax rate = 2.5% o SUTA Taxes = $19.3K o FUTA Base Tax = $3.6K o FUTA Add-on = $7.2K o FUTA Add-on as % of Total Taxes = 23.9% FUTA Base Tax 12% Percentage of Total Unemployment Taxes FUTA Add-on 24% SUTA Taxes 64% SUTA Taxes FUTA Base Tax FUTA Add-on 24 12

A Tale of Three Employers - #3 o Retail Hardware Store Owner with 8 employees o Total Payroll = $72.7K o Taxable Payroll = $50.2K o Year s Benefit Charges = $0K o Account Balance = +16.8K o SUTA Tax rate =.3% o SUTA Taxes = $150 o FUTA Base Tax = $234 o FUTA Add-on = $468 o FUTA Add-on as % of Total Taxes = 54.9% Percentage of Total Unemployment Taxes FUTA Add-on 55% SUTA Taxes 18% FUTA Base Tax 27% SUTA Taxes FUTA Base Tax FUTA Add-on 25 Ohioans Receiving Benefits o Different methods for measuring Continuing claims Total individuals receiving a payment in year o For the week ending July 26, 2014, we had about 68,000 regular continuing claims. During the week ending July 25, 2009, we had about 239,000. o In 2009 we issued a total of 698,248 1099 forms. This year we expect to issue fewer than 300,000. 26 13

Do all unemployed get benefits? The recipiency rate measures the percentage of unemployed who receive regular unemployment benefits. o In 2013, Ohio s recipiency rate averaged 20%, which ranked us 45th among states. o This means that 80% of unemployed Ohioans did not receive state UC benefits in 2013. 27 Comparison with Other States o Ohio s average UC tax rate on total wages (.64%) is lower than the US average (.86%). Rank: 10th lowest o Maximum benefit amount is higher than the average. Rank: 11th highest o Average weekly benefit of $321 is higher than the average. Rank: 17th highest o Average weekly wage is close to the national average. Rank: 25th highest o Recipiency rate is low. Rank: 40th highest 28 14

Changes Resulting from House Bill 2 o Clarifies that the ODJFS director may require UC claimants to report to a local OhioMeansJobs Center at any time in the benefit year o Organizes all work search waivers into law and adds one new waiver o Establishes the Reemployment and Eligibility Assessment Program in statute and establishes a continuing denial of benefits for failure to participate o Requires active registration with OhioMeansJobs.com 29 Trust Fund Status 30 15

Solvency and the Great Recession o Ohio s trust fund became insolvent on January 12, 2009. o At that time, Ohio was the 4th state to become insolvent. o As a result of the Great Recession, eventually the trust funds of 36 states became insolvent, borrowing a total of $130.3 billion. o Since that time, we have borrowed a total of $3.39 billion. 31 Current Borrowing Status o Currently, 13 states have federal loan balances, and another 7 have bonded their debts on the private market. o Ohio s current federal borrowing balance is $1.38 billion. o Since 2009, we have applied $1.45 billion in state SUTA tax, as well as $555 million in FUTA offset credit reduction funds, to repayment of the federal loan. If we maintain current claim levels and tax collections, we expect to pay off the loan by 2017. 32 16

Federal Borrowing: Why and How? o Benefits must be paid without regard to the trust fund balance. o Feds provide needed resources, which must eventually be repaid. o There is no established repayment schedule. o After 2 years of borrowing without repayment, employers gradually begin to lose their FUTA offset credit. 33 Ohio s Response to Insolvency in the 80s Benefit Changes o Added one-week waiting period o Froze maximum rates for two years o Increased the earnings requirement to qualify or requalify for benefits o Rounded benefits down to lowest even dollar Tax Changes o Increased taxable wage base from $6K to $8K over two years o Increased MSL tax by.5% until the loan was repaid o Increased the top experience rate 34 17

Impact of Federal Borrowing o Without state action, between 2011 and 2017, Ohio would be required to pay close to $250 million in interest charges from a state revenue source. o Ohio s employers will continue to lose their FUTA offset credit at a cost of about $93 million per year ($21 per employee). 35 Repayment of the Federal Loan o If FUTA taxes are repaying the loan now, why is any action needed? Current process socializes debt repayment Early repayment saves interest cost to state o Disproportionate tax impact By claim experience By wage distribution By industry type 36 18

Unemployment Trust Fund Balance Net Trust Fund Balance - June 30 $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $0 -$500,000,000 -$1,000,000,000 -$1,500,000,000 -$2,000,000,000 -$2,500,000,000 Net Trust Fund Balance 37 Other States Have Achieved Solvency Increase Revenue o Rate Inflate Schedule Raise or remove maximums Raise minimums o Taxable Wage Base Change impact by industry o Surtax ATB or targeted Reduce Expense o Reduce benefit amount o Reduce number of unemployed who qualify for benefits o Reduce duration of benefits Cap (Maximum) Back-load 38 19

Critical Financial Sustainability Issues o Maintain balance between benefits paid and taxes received o Trust fund must have the ability to build adequate reserves to sustain typical recession o System should provide for rebuilding the trust fund during times of relative prosperity so increased taxes do not further damage struggling industries. 39 Unemployment Myths 40 20

Myth #1: Employer FUTA taxes are rising because the state defaulted on its debt. 41 Myth #1: The state caused it. o There is no required payment schedule. o No state used general revenue to pay any part of the federal borrowing debt. o Those states that did pay off the debt did so by a combination of employer tax increases and benefit reductions. o A majority of states also passed all interest charges to employers. 42 21

Myth #2: Everyone is just staying on unemployment instead of working. 43 Myth #2: People prefer benefits to work. o For the 12 months ending in June 2014, only 25% of individuals who received a first payment exhausted their benefits. o Our exhaustion rate ranks 40th among states and compares to a national average of 43.7%. o Our average duration on unemployment for 2013 was 16.3 weeks. 44 22

Distribution of Benefits by weeks collected 80,000 Distribution of UC Claims by Number of Weeks Compensated Ohio: July 2013 - June 2014 25% 0.25 70,000 60,000 0.20 50,000 40,000 30,000 14% 0.15 0.10 20,000 10,000 5% 4% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 0.05-0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Individual Claims Percentage of Total - 45 Myth # 3: It makes no sense for an employer to appeal. The system is stacked for the claimant. 46 23

Myth #3: Not employer-friendly In the most recent quarter: o Claimant Appeals to the UCRC 27% favorable to appellant 73% unfavorable to appellant o Employer Appeals to UCRC 35% favorable to appellant 65% unfavorable to appellant o Claimants are 40% more likely to appeal. 47 Other Important Issues o Overpayment of Benefits o Reporting Fraud o Seasonal Businesses o Worker Misclassification 48 24

Office of Legislation Joseph Dunn joseph.dunn@jfs.ohio.gov 49 25