South By North Strategies, Ltd.

The U.S. Department of Labor estimates that outstanding loans to state unemployment insurance system will reach $90 billion by fiscal year 2013. The unprecedented demand for unemployment insurance partly is a consequence of the severe recession, but it also is the result of poor financing decisions made by many states during the 1990s.

In a recent paper, the National Employment Law Project analyzed the health of state unemployment insurance systems and offered the following state-level recommendations for restoring fund solvency:

State policy makers should resist reverting to the “equality of sacrifice” model in which roughly equivalent benefit cuts and tax increases are used to restore solvency. Overly generous benefits did not cause today’s crisis, and taking money out of the hands of jobless workers in today’s slowly recovering economy would do more harm than good.
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Employers in states that have adopted a “pay-as-you-go” approach to UI financing are now facing major costs that are a direct consequence of this philosophy. As they move out of the current solvency crisis, these states need to turn the corner and adopt forward-financing principles.

Insolvent states should conduct expert examinations of their UI financing mechan-isms and consider features that are recog-nized for promoting UI solvency. The most effective of these measures is indexing the taxable wage base. Other measures that should be considered include (a) ensuring adequate minimum and maximum tax rates, (b) establishing a fund solvency goal that enables the state to pay a year of benefits at a historically high recessionary level, (c) adopting social tax rates to recoup costs that are not individually charged and (d) establishing more responsive tax table triggers.
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In those instances where states with sound financing systems have become insolvent, the cause has almost always been a history of legislative intervention in the setting of tax rates. As an insurance program for the nation’s workers, UI financing and actuarial principles must be insulated from political efforts to utilize low UI tax rates as econom-ic development strategies.
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While there will be calls for Congressional responses to widespread state trust fund insolvency, states should not assume that federal debt relief will happen and should begin framing their actions in ways that demonstrate fiscal responsibility.