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Rising Unemployment In State Puts Stress On Key Relief Fund

Economy

ERIC GERSHON

November 27, 2008

Connecticut is spending more money on unemployment benefits than it's generating to pay for them and might run out of money, even if it raises taxes on businesses to the legal maximum, state officials said Wednesday.

Mounting job losses among state residents, including many who worked on Wall Street, pushed the unemployment rate to 6.5 percent last month, up from 6.1 percent in September.

With economists expecting the state to lose at least 62,000 jobs by mid-2010 and reach peak unemployment of 8.5 percent, officials worry that the state won't be able to keep up with claims.

"All indications are that we're looking at not having enough money in our unemployment benefits fund," Republican Gov. M. Jodi Rell said Wednesday during a press conference with Democratic Sens. Christopher J. Dodd and Joseph I. Lieberman. They gathered to announce that Connecticut, New York and New Jersey have applied for an emergency federal grant of $48 million to aid laid-off financial services workers.

Connecticut would keep paying unemployment benefits even if it exhausted its unemployment compensation trust fund, as it did in the early 1990s, by borrowing from the federal Department of Labor. But that would likely lead later to expensive assessments on businesses, which pay unemployment taxes.In the 12 months that ended Oct. 31, Connecticut paid $649.5 million in unemployment benefits, while bringing in $533 million though related taxes, according to labor officials. By year's end, the state will likely have paid a total of $680 million, the department projects, while having brought in about $540 million.

With the trust fund already running below its target balance of $630 million, Labor Commissioner Patricia Mayfield plans to suggest that the state raise one of two unemployment taxes to the maximum allowed by law, 1.4 percent, said George Wentworth, the department's director of program policy. The fund solvency tax, which is subject to change annually, is now 0.9 percent of the first $15,000 of an employee's wages.

Connecticut has two types of unemployment tax, the "experience rating tax," which ranges from 0.5 to 5.4 percent and varies by business, based on layoff frequency, and the fund solvency tax, which is applied evenly, but generally only in years when the state needs extra revenue to maintain the $630 million trust fund balance.

Established in 1993, when the state overhauled unemployment tax laws, the solvency tax has been imposed every year since 2002, and it has risen every year since 2006. It was last levied at 1.4 percent in 2003.

In opting for the highest possible unemployment tax, state officials are reflecting desperate economic conditions.

"I think this is symptomatic of the size of the problem that not only Connecticut is facing, but the nation as a whole is facing," Fairfield University economist Edward Deak said.

Raising the unemployment tax will make it harder for employers to keep workers or hire new ones, Deak said, probably contributing to further unemployment.

Yet the highest legal tax rate is not expected to do the trick.

"Even with the maximum fund solvency tax of 1.4, we expect we're going to fall well short of the fund solvency goal," Wentworth said. "How much below and how high the unemployment rate goes is what creates a level of risk for the fund."

The state could borrow from the federal Department of Labor, which has money set aside for states facing unemployment fund shortfalls, he said. Connecticut did that in the early 1990s, when the trust fund was last insolvent.

But borrowing would be expensive. "This is why you don't want to borrow," Wentworth said. "The cost of the borrowing ends up having to be recouped through special assessments on employers over and above all the taxes."

Wentworth said Connecticut does not face an "immediate" risk of having to borrow.

"Certainly, if the unemployment rate climbs steadily in the coming year, we could be facing a much more severe risk," he said.