The 2016 State Unemployment Insurance Trust Fund Solvency Report reveals that an improved economy doesn’t necessarily mean our state unemployment funds are ready for the next downturn.
What does this mean for employers who pay taxes into the state’s unemployment fund? Well, first you have to understand how it works.
Explains the report:
In the 2007-09 recession and its aftermath, 36 states depleted their UI funds and were forced to take advances from the Federal government to continue paying benefits. At the beginning of this year only eighteen states have reached what is considered the minimal level of adequate solvency, while four state UI programs still have approximately $7.3 billion in outstanding Federal loans and six states have an additional $8.3 billion in outstanding private borrowing.”
Readers can click on the interactive map in the report to jump to their state’s unemployment trust fund solvency report. While non-experts may not fully understand the significance of these complex charts and calculations, UST recommends getting to know the basics on each of the state’s reports to get a picture of how their state is faring:
UI Trust Fund Balance as of 1/1/2016 (line item 1): This line item tells you the state’s current amount of funds available to pay out unemployment claims from the Unemployment Insurance (UI) Trust Fund. This fund is mostly made up of money acquired through taxes on employers. Individuals do not pay into the state unemployment tax system. Some of the fund may also be made up of loans by the federal government, known as Title XII advances, or other private loans.
To find out the current amount of outstanding debt, look at the following:
- Outstanding Title XII Advances as of 1/1/2016 (line item 3): This is the outstanding amount loaned by the federal government that has to be paid back, with interest.
- Title XII Interest Owed (line item 4): The amount of interest that has accrued on the loans from the federal government.
- Estimated Amt. of Non-Title XII Debt Outstanding (line item 11): This is the amount of outstanding private debt.
Trust Fund Balance Compared to Yearly Benefit Costs (line item 12): The report also provides visuals to help understand how risky the unemployment fund is or how well the fund is prepared to cover unemployment benefits — by comparing the state UI Fund’s total reserves to its actual historical unemployment costs.
When the Reserve Ratio is lower than the 2015 Benefit Cost Rate, you know the fund could be in trouble.
- Reserve Ratio: state’s current UI Fund reserves as a ratio = total funds as of Jan. 2016 divided by total wages for 2015.
- Benefit Cost Rate: the historic benefit costs as a ratio = benefits divided by wages. On a sliding scale the report shows 2015′s benefit costs, the 3-year average high i.e. the three highest years in the last 20 years, and the worst-case scenario… the highest ratio of benefits paid to wages in the last 20 years. Note, the historic unemployment benefit costs include: regular UI benefits paid plus the state’s share of any extended benefits costs (shared with the federal government when weeks of unemployment were extended beyond the norm). The historic benefit costs exclude benefits paid to employees of nonprofits that had opted to reimburse for unemployment, i.e. pay the state back for their employees’ unemployment benefits dollar-for-dollar instead of paying a tax rate that goes into the pooled state UI fund (Learn more on nonprofit reimbursing here).
For example, here’s what New York’s UI Trust Fund looks like. You can see the unemployment fund reserves (0.06 reserve ratio) are below the actual benefits paid out in 2015 (0.47 2015 benefit cost rate). And if they had a record year like the Highest Yr. Benefit Cost Rate would indicate (1.42), the reserves are well below what they would need to cover the costs.
You can also see the Solvency Level (line item 13) aligns with the Reserves vs. Costs scale above it, and paints a pretty clear picture in red (insolvent) or green (solvent) how solvent the state’s Unemployment Fund is. The round marker in this chart represents the Average High Cost Multiple, which is measured as the Reserve Ratio (or Trust Fund as % of Total Wages) at the end of the 2015 calendar year, divided by the Average High Cost Rate (the average of the three highest benefit cost rates in the last 20 years or a period including three recessions, if longer).
Federal Unemployment Tax: If you want to get really technical, you could look at the state’s FUTA (Federal Unemployment Tax Act) tax rate on the report. Most employers pay a federal and a state tax (nonprofits are exempt from FUTA). The FUTA tax rate is supposed to be 0.6% if everything is going well. Essentially, the FUTA rate is 6.0% but the federal government gives states a break, or credit, of 5.4% currently if they’re in good standing, leaving only 0.6% to be paid on the first $7,000 of each employee’s salary [6.0%-5.4% = 0.6%]. But if your state has had outstanding loans that haven’t been paid back for two years or more, and the full amount isn’t paid back by November — that FUTA tax rate goes up because the federal government starts reducing the credits it applies to the full 6.0%. This continues incrementally (0.3% annually) until the debt gets paid back. California, for example, has a potential FUTA tax rate of 2.8% because they haven’t paid off their debt in years.
The Employer Perspective
For employers who pay into the State UI Fund through taxes, knowing how much outstanding debt your state has compared to how much it has saved up in reserves to pay out unemployment benefits — and whether the fund is solvent — can help you understand why your taxes may go up. For nonprofit employers, exploring the option of reimbursing may make sense if your state unemployment fund insolvency is causing higher tax rates on employers.
Also providing outplacement services to employees who lost their job through no fault of their own can help lower your unemployment costs by getting them back to work quicker. Often the reduction in unemployment taxes or reimbursement costs covers the cost of the outplacement services, plus it breeds goodwill for your organization. CareerArc, which provides outplacement services for all employees of UST’s member nonprofit organizations, reports that employees get back to work about 73% faster. (You can get a quote and find out if becoming a UST member is right for your 501(c)(3) here.)
Thirty-three of the fifty states in the report were in the “red” on the solvency scale. Even if unemployment taxes don’t increase, you should understand why it’s so important to protest improper unemployment claims and provide as much detail as you can to the state on claims from your former employees, so the state can make the right determination. This helps keep the system free of improper overpayments, which can strain the state funds.