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Unemployment Fund To Run Dry

Greg Bordonaro

April 06, 2009

Connecticut’s unemployment insurance fund will be insolvent by the end of this year, forcing the state to increase taxes on businesses and borrow hundreds of millions of dollars from the federal government to make up for the shortfall, state officials have confirmed.

The state is projecting to bring in about $640 million in insurance fund revenue this year, but mounting job losses will force it to pay out over a billion dollars in benefits, said George Wentworth, director of program policy for the state labor department.

“We’ll be bringing in less than we’ll be paying out,” Wentworth said. “The fund will be insolvent by the end of the year.”

Connecticut would keep paying unemployment benefits even when the insurance fund runs out but it will have to borrow money from the federal Department of Labor to make up for the shortfall.

The state labor department recently announced that 14,300 residents lost their job in February, pushing the state’s unemployment rate to 7.4 percent.

Over the past six months nearly 45,000 Connecticut workers have lost their job, and that number is expected to at least double by mid-2010, economists said.

“It’s something we are certainly concerned about,” said Matthew Fritz, a spokesperson for Gov. M. Jodi Rell. “We are monitoring the situation on an ongoing basis.”

Connecticut is not alone in facing a shortfall. Wentworth said there are at least eight states whose insurance funds have already gone insolvent and at least a dozen more are expected to follow suit by the end of the year.

Nationally, U.S. companies shed 742,000 jobs in March and the unemployment rate reached 7.6 percent at the end of January.

“”This is becoming a mutual problem,” Wentworth said.

The insurance fund, which last went insolvent in the early 1990s, is paid for by businesses, which are subject to two separate taxes that are assessed on the first $15,000 of an employee’s wages: the “experience rating tax,” and the “fund solvency tax.”

The experience tax ranges from 0.5 to 5.4 percent and is set annually based on a company’s past experience with unemployment.

The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies when the state needs extra revenue to maintain the fund’s target balance of $630 million.

Last year, the insurance fund paid out $700 million in unemployment benefits, but only took in $530 million, which bumped the fund solvency tax to 0.9 percent. In January the department of labor increased the solvency tax to its legal maximum 1.4 percent.

Currently, the fund has a balance of about $170 million, and even with the tax hike, the state is expected to fall well short of the billion dollars in projected payouts, Wentworth said.

Raising the unemployment tax will cost businesses an average of $470 per employee, extra expenses that could lead to further job losses in the state, said Bonnie Stewart, vice president of government affairs for the Connecticut Business & Industry Association.

“It’s a substantial hit to employers,” Stewart said. “We are going to go through some tough times.”

Wentworth said he expects the state to start borrowing from the federal government in December, and that it will need to continue to borrow “substantial amounts” of money well into 2010. He said the solvency tax rate will remain at 1.4 percent for about four years to help pay back those funds, which will not be charged interest.

Despite the grim outlook, Connecticut’s insurance fund shortfall could be partially offset by stimulus funds.

President Obama’s American Recovery and Reinvestment Act sets aside $7 billion for state unemployment funds, of which Connecticut is eligible for $87 million.

In order to qualify for the money, however, the stimulus bill requires states to expand unemployment eligibility and benefits to a wider population.

But since Connecticut already has expansive unemployment benefits it would need to do very little to be eligible for the money. The state already qualifies for $29 million of the funding, Fritz said.

To receive the remaining $58 million the state would simply have to extend benefits to “traveling spouses,” — those individuals who quit their job in order to relocate with a spouse who has changed their employment.

Rell has already proposed legislation to do that, Fritz said.

As part of the stimulus funding, job-seekers in Connecticut will also be getting a “bump” in unemployment insurance of $25 a week, and the federal government will pay for an additional 13 weeks of unemployment benefits making Connecticut residents eligible for up to 72 weeks of benefits