Posted on: August 1st, 2016
It’s a pretty safe bet that a significant share of this column’s readers has lost a job at some point. Whether due to layoffs, plant closings or disagreements with a boss, the loss of income and benefits can be devastating, and people are required to immediately begin to look for their next position. Thankfully, unemployment compensation kicks in as a safety net until another job is secured. This temporary assistance is made possible through a state’s Unemployment Compensation Trust Fund (UCTF), commonly referred to as Unemployment Insurance (UI). It stands to reason that it is critical that this fund remain solvent.
Last week, a Missouri Supreme Court decision struck down a Missouri law passed by the legislature in 2015. That law (HB150) limited the duration of unemployment payments to 13 weeks, changed the method by which Missouri would repay federal advances, and raised the fund trigger, providing less aid when fewer people are searching for work. It provided built in assurances that the state’s UI fund would be much better prepared for future downturns. The map below illustrates just how ill prepared Missouri’s UI was as the recession hit the local economy in Q1 2008 (Source: Tax Foundation).
According to this report by the Boston Fed, the massive job losses sustained during the Great Recession that began in 2007 prompted at least 35 states to borrow from the federal government to shore up the unemployment trust funds. By 2011, combined state unemployment insurance debt totaled $42 billion, and states began to raise taxes to pay for the principal and interest on that debt. When state funds become insolvent, the federal government imposes penalties that can make a bad situation even worse.
Employers in states whose Unemployment Funds are in good standing, solvent and following federal law can credit state UI taxes up to 90 percent of their federal UI tax, resulting in a federal tax rate of 0.6 percent plus state UI taxes. When states’ UI funds fall into insolvency, they begin to lose these credits at a high cost to employers.
The Boston Fed report determined, “There is a strong relationship between a state’s borrowing activity in or after the Great Recession and the financial status of its trust fund at the beginning of the downturn. When the tide of economic growth receded in the Great Recession, it became clear that some states were ill prepared for even a lesser downturn. The states that borrowed most heavily also faced higher unemployment, on average, than other states.”