Unemployment Insurance State Trust Fund Solvency National Employment Law Project Conference - Washington DC December 7, 2009 Robert Pavosevich pavosevich.robert@dol.gov
Unemployment Insurance Program Financing Employers 1) FederalTax Flat Rate: 0.8% on first $7,000 of wages ($56 maximum per covered employee.) Pays for: Administration Extended Benefits (EB), and loans. 2) State Tax Variable Rate: On average about $275 per job in FY 2008. Pays for: State benefits and State share of EB. 9
History of UI Financing 12 10 8 Aggregate State Benefits, Contributions and Reserve Ratio Trust Funds as % of Total Wages % of Total Wages Contributions Benefits 2.5 2 6 1.5 4 1 2 0 State Agg. Trust Fund Reserves 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Year 0.5 0
AHCM By State Pre-Recession 4 3 2 1 0 States Above 1.0 AHCM 1979 = 24 1989 = 32 2000 = 30 2007 = 19 1979 2007 1989 2000
3.0% 2.5% 2.0% 1.5% State Trust Fund Status Forecast 3.0% 2.5% 2.0% 1.5% % o f to tal w ag es 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Income Outgo Net Balance Year 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0%
Forecasted Level of Title XII Borrowing* ($ B illiions) 100 90 80 70 60 50 40 30 20 10 0 7 States 2 4 7 States Forecast 61 23 States 1993 2004 2009 2010 2011 2012 86 35 States 90 37 States 85 40 States * Based on President's economic projections of mid-session FY2010 Source: U.S. Dept. of Labor, Office of Unemployment Insurance, Division of Fiscal and Actuarial Services
UI StateTaxable Revenue Employer UI Assigned Taxable Contributions = Tax Rate * Wages 1) Benefits Paid 2) State Law 1) Total Wages 2) Taxable Wage Base
Adequate Financing Rate The flat tax rate necessary to adequately fund UI benefits. Adequate Long Term Avg. Financing Rate = Benefit Cost Rate + Solvency Amount Long Term Benefit Cost Rate = 10 Year Avg. of (Benefits / Taxable Wages) Solvency Amount = Difference Between Current Trust Fund and Amount needed to Reach AHCM 1.0 in 5 years.
UI Adequate Financing Rate with Average Tax Rate (as % of Taxable Wages) % of Tax wages 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Adequate Financing Rate Average Tax Rate 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Year
State Average Tax Rate Compared to Adequate Financing Rate 8% (% of Taxable Wages) 7% 6% 5% = Adequate Financing Rate 2008 = Average Tax Rate 2008 = Currently Borrowing 4% 3% 2% 1% 0% MI CA IL PA NY RI PR WI KY MA SC WV OH VT NJ IN AR TN DE MD TX AL DC NC ID GA CT MO LA AK OR VA MN CO Source: U.S. DOL ETA/OWS/DFAS Significant Measures of State UI Tax Systems Report 2008 WA IA NH ND NV MS MT OK HI FL KS NE AZ SD ME WY UT NM
California California Difference Difference Between between Adequate Adequate Financing Financing Rate and Rate Avg. and Tax Avg Rate Benefit Costs 5 6.00 4 Adequate Financing Rate 5.00 % of Total Wages 3 2 1 Reserve Ratio Avg. Tax Rate 4.00 3.00 2.00 % of Taxable Wages 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006-1 Year 1.00 0.00
80% Distribution of Employers and Wages by Effective UI Tax Rate (2008) 70% 68% % of UI Taxable Employers % of Employers /Payroll 60% 50% 40% 30% 20% 10% 0% % of Total Payroll 54% 30% 18% 7% 10% 4% 4% 3% 2% < 0.5%.5% < 1.0% 1.0% < 1.5% 1.5% < 2.0% > 2.0% UI Tax Rate (% of Total Payroll)
$350 2008 Contributions Per Covered Employee at the Minimum Rate (Minimum Tax Rate * Taxable Wage Base) $300 $250 ($) $200 $150 $100 $50 $0 U.S. Average $58 AL OR MA MN WV PR SC NJ IN NV ME KY ND AL TN UT TX DE NH LA MI GA CO IA MO SD WA RI CT PA DC CA IL ID AR VT WY MS OH NY MT MD NE OK VA FL NM WI AZ HA KS NC VI State
Impact of Under-Funding in State UI Programs Reduces the effectiveness of UI as an automatic stabilizer for the economy. Leads to cuts in UI benefits. Reduces the level of Experience Rating UI taxes.
Options to Address Under-Funding of State UI Benefits Re-Insurance (National UI Commission, 1980) Raise The Federal Taxable Wage Base (1983) Federalize the System (Mashaw, Graetz, 1999) Solvency Standards/Incentives (ACUC, 1996) Tax Rate Requirements Minimum, Maximum and Social Rate Restrictions (1935) Employee Tax ( 3 States, Inter. use) Restrict use of Cash Flow Loans based on state solvency (ACUC, 1996)
Addressing State UI Solvency 1) Helpful to make wage base and tax rate changes at the same time. 2) Solvency Standards / Incentives can be counterproductive if benefits can be cut. 3) There are several state examples of adequately funding a higher level of UI benefits: Oregon, Maine, Massachusetts..And Federal partner is always available for assistance in modeling, forecasting, and actuarial support: http://www.workforcesecurity.doleta.gov/unemploy/finance.asp
10 8 6 4 2 0 Long Term Forecast with No Solvency Changes Benefits, Contributions and Reserve Ratio Trust Funds as % of Total Wages % of Total Wages Reserve Ratio Benefits Contributions 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 2 1.5 1 0.5-2 Year Source: US DOL ETA/OUI/DFAS -usng mid-session FY10 economic assumptions. 0