$25 million will go to pay interest on Ohio unemployment debt

by Policy Matters Ohio on June 21st, 2012
June 21st, 2012
   

Employer taxes have not kept pace with needs, leaving Ohio’s unemployment compensation trust fund chronically underfunded. Because the state has been unwilling to fix the problem, Ohio is now diverting money to pay interest on money owed the federal government.

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See previous report on UC fund solvency

Chronic underfunding diverts resources from other needs

The Ohio General Assembly recently approved the use of another $25 million to pay interest on the state’s unemployment trust fund debt as part of a mid-biennium budget bill.

When Ohio has so many unmet needs, with schools and local governments seeing major reductions in funding, it is illogical for the state to be forking over tens of millions of dollars in such interest charges. The debt exists because employer taxes over time have not kept pace with needs.

“We have been unwilling to face the chronic underfunding of our unemployment trust fund,” said Zach Schiller, research director at Policy Matters Ohio. “The result is that we continue to have a large debt, and to pay interest charges with money that would be better spent meeting the needs of Ohioans and investing in the future.”  

Ohio borrowed from the federal government to pay unemployment benefits when its fund went broke in early 2009. The state has paid some of the money back but still owed $1.79 billion as of June 18. Bringing the fund back to health will mean not only paying off the debt, but rebuilding it so there are sufficient resources to pay benefits when the next downturn comes along.

As a part of the current biennial budget, the General Assembly last year transferred $103.3 million into a fund that is being used to pay interest on Ohio’s unemployment trust fund debt to the United States. This money was used to make a $70.9 million payment last September, leaving about $32.4 million in the fund. The Ohio Department of Job & Family Services (ODJFS) estimates that the trust fund will owe $67.5 million in interest to the U.S. in September.

House Bill 487, the recently approved budget bill, included a transfer of $25 million into the fund, producing a total of $57 million. While state officials haven’t yet come up with a specific plan on where to find the additional $10 million that will be required, ODJFS is confident that the money will be available from other available resources.

Ohio’s unemployment compensation (UC) system is paid for by employer taxes. Ohio underfunded its UC system for many years, so that the trust fund was ill prepared for the 2007-2009 recession. The recession caused the number of unemployed to skyrocket, increasing the amount of benefits that was paid out. Ohio’s unemployment compensation benefits are not overly generous – they average about $300 a week, and relatively fewer unemployed Ohioans qualify for benefits than do jobless workers in most other states.

The key problem is that employer contributions have not been sufficient, leaving the fund ill-prepared when benefit levels increase. For 11 out of the past 13 years, employers have paid less into the fund than was paid out in benefits. Ohio employers pay taxes on only the first $9,000 in each employee’s annual wages, or less than a quarter of wages paid. That amount, which is well below the national average, hasn’t been raised since 1995. Altogether, if Ohio employers had paid the average tax paid by employers across the U.S. between 1996 and 2006, the state trust fund would have received an additional $1.7 billion.

While it’s not unreasonable that Ohio had to borrow during this period of high and long-term unemployment, it is clear that Ohio’s UC solvency problem is not so much a product of the poor economy as much as poor policy. After years of underfunding this crucial system, Ohio needs to face the need for more adequate financing and a higher taxable wage base, in particular.

A Policy Matters Ohio report last October provides a more detailed review of the Ohio unemployment trust fund solvency issue: http://www.policymattersohio.org/?p=5730.

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