Ohio fund paying jobless benefits out of money, but state not working on long-term fix
Cleveland Plain Dealer - August 6, 2012
The fund that pays jobless benefits in Ohio went broke in 2009, and there’s no evidence the state is looking for a lasting solution.
The sagging Ohio Unemployment Compensation Trust Fund needs a long-term fix to make it solvent, say experts and others who are urging officials to make it a priority. And even though the unemployed still receive benefits because of federal loans obtained by the state, such debt comes at a cost.
Next month, the state expects to pay $65 million in interest charges on the debt, said the Ohio Department of Job and Family Services, which oversees unemployment programs. Last September, Ohio paid $70 million in interest.
“For us to be spending money on interest charges given the needs of the people of Ohio is bad policy,” said Zach Schiller, research director for the think tank Policy Matters Ohio, that wants state officials to find a sustainable solution for the fund. “It potentially has an impact on whether we cut funding to our school systems, whether we have cops on the beat and whether we have enough money to pave roads.”
The current trust fund debt is nearly $1.8 billion. It was at its highest at $2.6 billion in 2011.
Mike Evangelist, a policy analyst with the National Employee Law Project, said employers need to pay more into the fund. The fund’s source is a tax that employers pay on the first $9,000 of an employee’s salary. That is far below the national average for taxable wages, which is more than $16,000.
“By law, it (minimum taxable wage) has to be at least $7,000,” said Evangelist, whose organization tries to get public officials to address insolvent trust funds. “Ohio is pretty bad. Only a few states are lower.”
State Rep. Ron Young, the Leroy Township Republican who chairs the Commerce, Labor and Technology committee, is also concerned about a continuing big expense that could have potentially been avoided.
Opinions differ on what caused the insolvency and how it should be addressed. Schiller agrees with several experts who say many states have trust funds that are broke because the amount of tax that employers pay into the fund is too low. The high unemployment in recent years highlighted the flaw.
Young and state Sen. Kevin Bacon, the Columbus area Republican who chairs the Insurance, Commerce and Labor committee, believe the trust fund went broke because of an economic anomaly — the Great Recession.
Both legislators are hesitant to make changes they deem may be too severe. They say as Ohio’s jobless rate dropped, it has helped lower the debt as fewer people make unemployment claims.
“It is like a family who had some sort of terrible accident in their home that destroyed their appliances, and they had to invest $20,000 in new appliances,” Young said. “That doesn’t mean ad infinitum they will budget $20,000 quarterly for appliances.”
The legislature is responsible for making changes governing the trust fund. Bacon and Young said there are currently no proposals before the legislature. Young, who said the issue may surface because of growing concern about the amount of interest payments, wants to explore using rainy day funds.
Evangelist, who authored a recent paper on trust funds, said even before the recession began in December 2007, Ohio’s trust fund was deficient. Federal benchmarks say it should have had nearly $3.7 billion. The fund only had $445 million, making it then the fourth least prepared fund in the country. Michigan, New York, and Missouri were worse than Ohio.
State officials have known since at least 2006 that the trust fund risked going broke, even in an economic downturn nowhere as deep as the one that would occur. Over the years, officials had sought recommendations for fixing it, but never acted on them.
The Unemployment Compensation Advisory Council, which is comprised of legislators, business and labor leaders, made recommendations. So did Wayne Vroman, an economist with the Urban Institute in Washington, D.C, who is considered the leading expert on insolvent trust funds. (Vroman has a contract with ODJFS relating to the state’s unemployment insurance financing.)
Still, the ODJFS remains focused on more short-term goals.
“Our first priority is paying off the debt,” spokesman Ben Johnson said in an email. “There have been informal conversations about long-term solvency. The important thing is to craft a plan that maintains unemployment compensation for those who need it without overburdening business owners and taxpayers.”
If Ohio decides not to institute changes, it will take another five to six years just to pay off the debt, said Vroman. The federal loan includes an automatic repayment system requiring employers to pay a penalty. Since January, they have paid $21 per employee a year, which will increase to $63 by 2014.
Ohio’s $1.8 billion loan balance ranks it fourth in federal trust funds. Twenty states and the Virgin Islands had outstanding balances totaling nearly $28 billion as of July 26. The figure would have been higher had the feds not forgiven the interest for all insolvent trust funds in 2009 and 2010.
About a dozen other states have insolvent trust funds, but they aren’t reflected in the federal total because the states got money on the private bond market. They include Michigan, with a debt of more than $3 billion, and Texas, with one of about $2 billion.
Key to the various trust fund recommendations made in the past was taxing employers more, though by how much varied.
Vroman said indexing the amount of salary taxed was crucial. Indexing would tie the salary taxed to the statewide average wage, meaning the tax would automatically increase as wages rise.
He contrasted the Social Security tax employers pay with the unemployment compensation tax. Both were formed by federal legislation in the 1930s requiring employers to be taxed on the first $3,000 of an employees’ salary. The Social Security tax was indexed, so that today employers are taxed on the first $110,000 of a worker’s salary.
Vroman said more than 15 states have indexed the taxable wage base at between 50 to 100 percent of the state average annual wage.
“If Ohio went with 50 percent, it would cause the total amount of taxable wages to go up very substantially — by 70 or 80 percent,” he said. “The trust fund would be in better shape.”
Andrew Doehrel, president and chief executive officer, of the Ohio Chamber of Commerce, co-chaired the advisory council that made recommendations several years ago aimed at preventing the trust fund from going broke. He said the panel had supported a modest increase in the employer’s tax coupled with a freeze on benefits.
Doehrel continues to be against a significant tax hike for employers because he said it puts an unfair burden on businesses and discourages companies from locating to Ohio.
Schiller said the business threat is overstated.
“I would ask the people who say that to cite what companies moved to Ohio and expanded in Ohio because of the low trust fund tax during the very long period,” he said.
Doehrel said labor and business could potentially lose, so neither was interested in reaching resolution.
Vroman said a bill in Congress requiring employers to pay taxes on a minimum of $15,000, and index that amount, held the best hope since it would have been implemented nationally. The bill, introduced in 2011, still hasn’t been acted upon.
Doehrel isn’t optimistic any changes will happen on the state level soon.
“We (advisory council) advocated for something to be done starting back in 2006,” he said. “Here we are six years later, and we’re no closer to solving this.”
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