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That could force the state, for the first time in two decades, to borrow money from the federal government to pay jobless claims by laid-off workers.
The state’s unemployment reserve fund, already well below national averages and federal recommendations, has just a quarter of the cash it had 71/2 years ago on the eve of the country’s last economic crisis, state and federal figures show.
Steps to strengthen the fund reserves take effect early next year, but the fund could face a crisis if jobless claims shoot up before then, experts said. The fund’s financial strength matters because the state is required by federal law to pay its promised benefits to the unemployed and, if it lacks the money to do so, could have to borrow federal dollars, lower the level of promised benefits or raise taxes.
“It’s sort of like playing roulette,” said Wayne Vroman, an economist at the Urban Institute, a think tank in Washington, D.C.
“Wisconsin may well go through this economic period without much of an increase in its unemployment rate,” he said. But “if the payouts go up very sharply in the next part of the year, you could burn through most of your trust fund by the end of the year.”
Wisconsin’s low trust fund levels are part of a national trend, and reflect one way in which the safety net for the state’s workers in the current economic downturn is weaker than it was at the start of the 2001 recession. Concerns about the financial strength of the unemployment program, the first of its kind in the nation, also come as the state recovers from disastrous flooding and faces stress on the overall state budget.
Officials cite law signed in March
State officials said a law signed by Gov. Jim Doyle in March and designed to head off problems for the fund will boost its reserves starting next year by significantly increasing the taxes being paid into it for the first time since the 1980s.
But since the passage of the law, year-to-date state jobless claims have increased by more than 5 percent, said Hal Bergan, administrator for the state Division of Unemployment Insurance. Plus, the fund will not see money from the added taxes called for under the bill until April. In the meantime, the fund will have to weather the winter months — a time of the year in the state marked by the highest jobless claims and lowest tax revenues for the fund.
A state projection shows continued high jobless claims could leave the fund $6.2 million short at the end of March 2009, Bergan said. An infusion of cash from tax collections — the biggest of the year — would soon follow in April, leaving the fund back at $255 million to the good at the end of that month.
“We’re concerned about that period,” Bergan said of the winter months, acknowledging the state might be forced to seek a short-term federal loan. “It’s just our best guess for right now, and we’ve found that benefit levels are hard to predict.”
Bergan said the state wouldn’t have to pay interest on a federal loan as long as it was repaid by September.
The last time the jobless fund had to borrow money from the federal government was in the early 1980s, a severe case in which the state borrowed $737 million. To pay off the debt, state businesses shouldered higher payroll taxes, paying $125 million in interest on the loan, and jobless benefits were frozen for five years, according to a recent report by the state’s Unemployment Insurance Advisory Council.
State Department of Workforce Development Secretary Roberta Gassman, who oversees the unemployment program, said state officials are watching the fund carefully.
“Should we see these newer levels of unemployment continue at this kind of rate, there might be some additional action that the state would take to make sure the fund continues to be strong,” Gassman said.
The department can’t abruptly stop paying benefits to workers because of a shortage of money, but the state Legislature can take actions such as reducing those benefits or raising the taxes paid into the fund.
Normally, the fund pays out money during a recession and then builds its reserves as the economy improves. But that didn’t happen after the last recession, with the fund dropping 76 percent in less than a decade, from $1.82 billion at the end of 2000 to $431 million as of July 15, according to state figures.
A May report by a national worker advocacy group rated Wisconsin’s unemployment insurance trust fund as “nearly insolvent,” with only eight other states’ funds ranked as being financially weaker than Wisconsin.
The report by the National Employment Law Project, of New York, drew on a commonly used measure of how long the money in a state’s jobless claims fund would be able to cover the higher payments that the state has averaged in past recessions. A federal advisory has recommended that state funds be able to handle a full year of these peak-level payments without using its incoming tax money.
But as of December 2007, Wisconsin’s fund could handle only about 3 /2 months of such claims, according to the report’s analysis of federal statistics. That’s much less than the average for all states, which have more than six months of reserves. It’s also below what Wisconsin’s fund had just before the 2001 recession, when the fund had enough to cover 13 months of claims.
State’s unemployment rate may increase
Wisconsin’s unemployment rate, when adjusted for seasonal changes, was at 4.6 percent in June, up 0.2 percentage points from May but still lower than a year ago.
A May forecast by the state Department of Revenue projected that Wisconsin could see its unemployment rate increase in the coming months and average 5.6 percent in 2009.
In Wisconsin, qualifying workers who lose their jobs can seek unemployment insurance payments, which are paid for by a payroll tax on employers that ranges from 0.1 percent to 9.8 percent of applicable wages, depending on the employer’s history of layoffs.
The recently passed law increases the amount of an employee’s wages subject to the payroll tax, starting in January 2009, from $10,500 to $12,000 — the first increase in that amount since 1986, according a report by the state unemployment advisory council, which recommended the changes. That wage base will increase to $13,000 in 2011 and $14,000 in 2013.
Also, in a provision separate from the bill, if the balance of the unemployment fund is less than $300 million on June 30, 2009, the tax rates will automatically increase starting in 2010, a scenario Bergan called “entirely possible.”
Phil Neuenfeldt, a member of the advisory council and secretary-treasurer of the Wisconsin AFL-CIO, said he is “apprehensive” about the fund and believes it needs a close watch.
“If we’re in a nose dive, the sooner we figure out how to fix it, the better we’ll be,” he said.
Jason Stein is a reporter for the Wisconsin State Journal in Madison.
Myturn wrote on Jul 22, 2008 6:11 PM: