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Benefits in doubt: Turbulent period in unemployment-insurance program has led to many changes in state and federal policies

by Laura Kliewer ~ March 2014 ~ PDF of Stateline Midwest article »
In Minnesota, state legislators have created a new program to better help displaced workers turn a lost job into an entrepreneurial opportunity.
Meanwhile, that state and a growing number of others in the Midwest are trying to keep more people from losing their jobs in the first place — by reworking unemployment-insurance programs in ways that encourage employers not to lay off workers when business is slow, but to instead reduce their hours.
Across the country, policymakers are re-examining and, in some cases, reshaping unemployment insurance. The safety-net program has been around since 1935, but it has received heightened attention ever since the Great Recession hit in 2007.
That severe economic downturn triggered a rise in the number of displaced workers as well as a financial crisis in many states’ unemployment-insurance trust funds. Today, even as state economies recover and jobless rates fall, the attention being paid to unemployment insurance has not waned. In Washington, D.C., much of the focus has been on whether to extend benefits for the long-term unemployed — a policy decision that has important implications for states (see sidebar article at bottom of page).
In some state capitols, the long-term solvency of trust funds remains a concern, and lawmakers across the country are also exploring a host of policies related to unemployment insurance.
For example, how many weeks should the state provide benefits to the unemployed? And how should the state tax its businesses, the source of revenue for unemployment-insurance trust funds?


Changes in jobless benefits, taxes

In Kansas last year, the Legislature made changes (they took effect this year) that link the duration of unemployment insurance benefits to the state’s jobless rate. Instead of automatically using a 26-week maximum (the time period traditionally used by Kansas and other states), the maximum can now fall to as low as 16 weeks when the unemployment rate drops below 4.5 percent. Starting on Jan. 1, the maximum number of weeks unemployed Kansans can receive benefits fell to 20, based on the unemployment rate for the preceding quarter falling between 4.5 percent and less than 6 percent.
“We felt like if we cut back the weeks, it would help people who are used to being on the rolls to get back to work,” Kansas Senate Assistant Majority Leader Julia Lynn says.
The same 2013 measure, HB 2105, also increased Kansas’ taxable wage base, which helps determine the amount that businesses pay into the unemployment trust fund. Kansas’ current taxable wage base is $8,000, but starting in 2015, the first $12,000 of each worker’s earnings will be subject to the unemployment insurance tax; that then increases to $14,000 in 2016. (According to the Center for Budget and Policy Priorities, the median state taxable wage base in 2012 was $12,000.)
And then there are some of the newer innovations that have taken root in states, such as Minnesota’s Converting Layoffs into Minnesota Businesses program, or CLIMB, and the Short Term Compensation Program. CLIMB was included as part of a broader measure (HF 729) passed by the Minnesota Legislature in 2013.
It offers entrepreneurial training, business consulting and technical assistance to dislocated workers trying to start or expand a business. Participants are eligible for unemployment benefits while participating in the program.
The federal government has authorized states to offer such entrepreneurial training to displaced workers since 1992 and to pay a “self-employed allowance” to those who qualify. Two years ago, the U.S. Congress passed a law aimed at helping states expand help for these budding entrepreneurs and fund such programs.
That same law also provides new incentives for states to implement a Short Term Compensation Program.
Also known as “work sharing,” the program gives employers an alternative to laying off workers when business is slow or temporary cuts are needed. Instead, workers are kept on the job at reduced hours. To replace the lost income, these employees are eligible for partial unemployment benefits.
Proponents of work sharing say it is a “win-win.” Employers weather economic downturns by reducing payrolls but are able to retain skilled workers. Workers, meanwhile, are able to stay on the job (albeit at reduced hours), maintain their skills, and often retain health and retirement benefits.
Iowa, Kansas and Minnesota had a Short Term Compensation Program in place before passage of the new federal law. Michigan, Ohio and Wisconsin are among the states that have more recently adopted the work-share model.

 

Why unemployment insurance?

Amid all of these policy changes, and the volatile financial period in trust funds that states had to weather, it is important to remember the underlying purpose of the nation’s nearly 80-year-old unemployment insurance program, says Chad Stone, a chief economist for the Center on Budget and Policy Priorities.
“From a societal standpoint, you don’t want square pegs to try and fit round holes,” he notes. “You want people to find jobs that are suitable to them and employers to find people who are suitable for them.”
Unemployment benefits (typically amounting to about half of a displaced worker’s earnings) provide individual workers with the time and financial cushion they need to land back on their feet.
For businesses, the key is finding the right balance in how the unemployment insurance is structured and financed, according to Joseph Henchman, vice president of legal and state projects at the Tax Foundation.
“We don’t want businesses to bear the full costs of laying off their employees,” Henchman says, or “good employers who never lay people off to bear too much of the burden of employment costs.” State programs strive to strike that balance by having most employers pay into the trust fund, but having higher tax rates for those with a record of layoffs.
Stone points to a third factor worth considering — the impact of the program beyond affected workers and businesses.
“It’s an automatic stabilizer for the economy,” he says. “Unemployment insurance provides money [to displaced workers]. It replaces about half their wages. They need it to meet their needs, and they spend it ... and that injects some extra demand into the economy at a time when the economy is weakening.”

Hard times, tough policy decisions

States have considerable latitude to shape their unemployment-insurance programs within broad federal guidelines. In response to the economic downturn that strained unemployment-insurance trust funds, for example, some states such as Illinois and Michigan moved to cut the maximum duration of benefits. In Illinois, the cut was only temporary, and the benefit has since been restored to 26 weeks (this is the maximum in most states).
In 2011, the Michigan Legislature made changes that allow the long-term unemployed to continue to receive extended benefits (paid by the federal government) but that also cut the number of weeks available to displaced workers under the state’s regular unemployment-insurance program (20 weeks instead of 26 weeks).
Illinois and Michigan were among the many states nationwide that had to make other changes to shore up their trust funds. At the height of the Great Recession, 36 states (including all but Iowa, Nebraska and North Dakota in the Midwest) had to borrow money from the Federal Unemployment Account.
The rises in unemployment may have prompted this fiscal emergency, but Stone says state policies that preceded the national economic downturn also contributed to the problem.
“What states have done in good times is stop contributing [to the trust funds] or reduce the tax rate, giving tax cuts to businesses,” Stone says.
States, as a result, simply weren’t prepared to get through an especially bad time.
Henchman notes, too, that unlike in other areas of budget planning, not enough attention is paid to how lawmakers can provide their state trust funds with the necessary cushion. Policy deliberations over state general-fund budgets, for example, include an understanding about the need for a rainy-day fund, and even how much it should be.
That is not necessarily the case when it comes to unemployment-insurance trust funds.
“Before the recession,” Henchman says, “it would have been nice for states to have two or three years [worth of reserves] in their trust fund. I’m pretty sure [many] don’t have that now.”
Still, these state funds are in better shape than they were only a few years ago, due in large part to some of the policy decisions taken by legislatures.
Michigan, which at one point owed the federal government $3.9 billion in loans to support its unemployment-insurance program, issued revenue bonds in order to restore the solvency of its trust fund.
Illinois lawmakers issued revenue bonds as well, and they also temporarily increased the taxable wage base (thus increasing taxes on businesses).
In both Michigan and Illinois, employers now pay a surcharge in addition to their annual unemployment insurance tax to repay the bonds.
Increasing tax rates and the taxable wage base, in fact, were common policy steps taken by legislatures around the country. (The taxable wage base and the rate at which employers are taxed for unemployment insurance can vary widely from state to state, industry to industry, and business to business. See table on this page.)
Between 2009 and 2013, the taxable wage base increased in seven Midwestern states: Illinois, Iowa, Michigan, Minnesota, North Dakota, South Dakota and Wisconsin.
In Minnesota, the base rate that businesses pay on the first $29,000 of employees’ wages was raised to 0.5 percent and a new assessment was placed on employers’ tax bills. By 2013, with unemployment rates falling, legislation (HF 729) was passed to decrease the rate to 0.1 percent and to eliminate the special assessment. This tax relief was contingent on Minnesota’s trust fund having a balance of $800 million by Sept. 30 of last year; that target was met.

Planning for future downturns
The fact that states found themselves in the position of raising taxes on businesses during an economic recession underscores one of the points made by Stone and Henchman — the importance of planning for future economic downturns.
Michigan lawmakers established a new “triggering mechanism” that aims to avoid future deficits by developing and maintaining a surplus in the state trust fund. Under a bill passed in 2011 (SB 806), the Legislature increased the taxable wage base from $9,000 to $9,500. It could only fall back to $9,000 when the balance in Michigan’s unemployment-insurance trust fund reached $2.5 billion.
As of February, Indiana, Ohio and Wisconsin were among the 16 states that still had outstanding loans in the Federal Unemployment Account. The result is a higher federal unemployment tax rate for these states’ businesses.
In Ohio, concerns about the impact on state employers have led to proposals to pay down the loan — tapping into rainy-day funds, for example, or using estimated state savings from the federally funded expansion of Medicaid.