When the federal government established the Unemployment Insurance (UI) system after the Great Depression, it was designed to support workers who, “through no fault of their own” lost their jobs. Established to ensure that the economy could recover in the face of massive job losses, the state UI system is supposed to be a safety net.

The system is far from perfect though.

For instance, the system is intrinsically flawed for many nonprofit employers who face little to no job-turnover and who remain a part of their state system.  Featured in a recent report, the North Carolina UI system has provided one of the strongest examples of why eligible 501(c)(3)’s should consider opting out of their state UI system, as allowed by federal law.

After borrowing more than $2.4 billion from the federal government to meet their UI responsibilities after their UI Trust Fund became insolvent during the Great Recession, North Carolina has begun leveraging their high interest payments on state UI participants.

Like many states which were unable to meet their UI obligations, the burden of reimbursing the federal government for the full loans falls on all employers within the state, whether or not any of their former employees are currently collecting unemployment benefits.

No state reached insolvency overnight though.

Long before the recent recession, states resisted “indexing” or raising their unemployment taxes from year to year. Things were good, the economy was stable — why should they make adjustments?  But while employers enjoyed low taxes, in the long run they were being set up for a much bigger fall in the future. And that’s when the Great Recession hit. Not only had states failed to maintain an adequate UI cushion, employers would be double-hit by the recession in having to lay off workers to cut costs, and then pay higher unemployment taxes as a result.  According to a 2010 Government Accountability Office report, “Long-standing UI tax policies and practices in many states over 3 decades have eroded trust fund reserves, leaving states in a weak position prior to the recent recession.”  Not that states weren’t warned. Even in North Carolina, the Budget and Tax Center reports that it “conducted a thorough analysis of the unemployment insurance system in March 2007, before the start of the Great Recession, warning of the long-term unsustainability of the system as implemented and suggesting reforms.”

More than ever, systems today must be built that can better weather economic downturns and large, prolonged layoffs. Adequate funding levels must be re-attained so that states rely less on the federal government for funding support to meet benefit payments. A system must also be built which maintains its ability to support the economy with wage-replacement levels that are adequate in supporting workers seeking work.

While innovative programs must continue to be introduced to help place jobseekers in new positions, an overhaul of many state UI systems would better support nonprofit employers who remain in their state tax-rated UI system whether they are too small to opt out, or if they feel safer in the state system.

However, because 501(c)(3)s have the exclusive right to opt out of their state UI system in favor of becoming a reimbursing employer that pays directly for former employees’ UI costs, many already experience a greater savings because they aren’t paying for the state’s interest on federal loans, or subsidizing larger employers’ UI costs.

Ask yourself:  Have you told other nonprofit employers about the ability to opt out of their state UI system? Have you considered the alternatives?