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Funding Crisis for Unemployment Programs Begs Reform


Rep. Jim McDermott (D-Wash.) (WDCpix)

Most state unemployment programs are flat broke, according to federal analysts, and the states themselves are largely to blame.

Thirty-four state unemployment insurance trust funds have run dry as a result of the recent recession, forcing those programs to take out nearly $40 billion in federal loans to weather the storm, the Government Accountability Office revealed this week.

[Economy1] The crisis is no accident, experts argue, but instead represents a failure on the part of many states to build up a funding cushion during the good years that could see them through the bad. Unemployment taxes levied on employers, many contend, have simply been too low to provide that insurance.

“Long-standing UI tax policies and practices in many states over three decades have eroded trust fund reserves,” Andrew Sherrill, the GAO’s workforce director, told House lawmakers on the Ways and Means Income Security subpanel Thursday.

Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group, echoed that message. “States,” he told the committee, “entered this recession far less prepared than they had entered any of [the] recent recessions over the past 35 years.”

The insolvency trend could have far-reaching ramifications, experts warn, threatening the capacity of struggling states to help jobless workers through the next recession. The trend also raises broader questions about how the UI system is funded. Sherrill told lawmakers that the funding formula is ripe for an overhaul.

“The long-term decline of UI funding, culminating in widespread borrowing by state trust funds and the dire financial condition of the program, raises critical questions about the ability of the program to function as it has in the past,” Sherrill warned. “Now is the time … to consider changes to federal program policies that could better assure the long-term financial structure of UI trust funds.”

The trouble, many experts say, is this: State UI programs — which provide 26 weeks of financial help to laid off workers looking for new jobs — are funded with a tax on employers. Yet states are given broad discretion to set their own rates, and in recent decades, they’ve drastically scaled them back. Indeed, between 1978 and 2008, Sherrill said, the minimum state UI tax rate on employers fell from an average of 1.14 percent to an average of 0.37 percent, relative to taxable wages. By contrast, the federal UI tax is an across the board 6.2 percent on the first $7,000 of wages.

“This is the single most important reason why so many state trust funds are insolvent today,” Stettler argued.

There’s another key factor contributing to the problem: The eroding wage base. That is, while states must establish a taxable base income of at least $7,000 (the federal standard) — and while many states go much higher than that — only 17 states index that base to wage inflation. It only makes sense that those states that are taxing a higher proportion of wages tend to have money remaining in their UI coffers. Indeed, NELP estimates that the insolvent states have an average wage base of $9,500, while the figure for solvent states is $20,500.

Some lawmakers are already eyeing the problem. Rep. Jim McDermott (D-Wash.), for example, blasted the ill-prepared states Thursday, arguing that they “ignored one of the basic rules of any insurance program, which is to save money in good times to pay out more during hard times.”

Not that the states are solely responsible for ensuring the solvency of the state UI programs. The GAO noted several reforms that Congress could enact on a national scale. The $7,000 federal wage base, for example, established in 1983, isn’t indexed to wage inflation. Doing so would force a number of states to hike their own taxable wage bases, which in turn would yield larger UI pools during periods of economic growth.

McDermott, who chairs the income security subcommittee, hinted Thursday that Congress would play a role in the reform process. “The question that will increasingly confront Congress is whether we can help states suffering from huge deficits in their UI funds, while also encouraging them to take the steps necessary to ensure a strong and solvent unemployment insurance system in the future,” McDermott said. “I think the answer is yes.”

Not everyone on Capitol Hill agrees. Rep. John Linder (Ga.), the senior Republican on the Ways and Means subpanel, blasted the notion that hiking UI taxes is the answer to the current insolvency crisis. That idea, he said, “is just the latest example of Democrats’ desire to never let a serious crisis go to waste.”

“They will use state insolvency caused by the recession and their failed trillion-dollar stimulus law to argue for even higher federal and state unemployment taxes, forever.”

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