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January 2010—Vol. 87, No. 11
Connecticut’s unemployment
compensation crisis
Fiscal problems point up the need to strengthen system’s
eligibility requirements and audit functions
The impact of the recession on Connecticut’s economy has been well-publicized. Nearly 100,000 jobs have been lost since the downturn began, we’ve seen a record number of business shutdowns, and declining income tax and sales tax receipts have put the squeeze on the state budget. Somewhat under the radar, however, has been the effect of the down economy on the state’s unemployment compensation (UC) system.
Unemployment benefits in Connecticut are paid out of the state’s Unemployment Compensation Trust Fund, which is financed entirely by employers. For-profit entities pay taxes into the Fund, while nonprofits reimburse it for monies paid out on their behalf. Because of the severity of the recession and the high volume of benefits paid out of the system, the Fund became insolvent in October 2009.
Troubling numbers
“The problem,” says Carl Guzzardi, unemployment compensation director of accounts for the state Department of Labor (DOL), “is the number of people unemployed and, now, the length of time people are unemployed.”
According to the DOL, $540 million in unemployment benefits was paid in 2007, and more than $700 million was paid in 2008. At the end of 2008, the Fund’s net reserve was $425 million, nearly $200 million short of the year’s Fund balance reserve goal of $611 million. Then came 2009. At the time of this writing, the DOL was projecting that more than $1.3 billion in unemployment benefits would be paid in 2009, while only about $640 million in taxes was expected to come in.
The resulting shortfall of approximately $700 million has forced Connecticut to begin borrowing from the Federal Unemployment Account, and the state is expected to continue borrowing up to approximately $900 million in order to meet its unemployment benefit obligations.
Addressing the problem
What’s the best strategy for restoring Fund solvency and maintaining it in the future? State policymakers can take several approaches, including
• Ensuring the proper functioning of the UC system so that it pays only those with legitimate claims and gets them back to work as quickly as possible
• Increasing revenue to the Fund through UC tax increases
• Some combination of the above
“Thus far, the DOL has chosen to look only at the tax side for solutions,” says John Rathgeber, CBIA president and CEO. “The proposals they’re putting forth would have a far-reaching impact on the unemployment tax structure and employers’ future tax liabilities. Given Connecticut’s experience in previous economic downturns, it is not clear that such significant UC tax increases are necessary or advisable.”
Moreover, notes Rathgeber, increasing the UC tax burden on employers at a time when most are already struggling to survive will make it that much more difficult for them to increase their investment in the state and create the jobs that are going to drive Connecticut’s economic recovery.
Rathgeber argues that any strategy for solving the Fund problem must first ensure that Connecticut’s unemployment compensation system is being used as it was intended—that eligibility requirements are being adhered to and that people who have lost their jobs are given the necessary assistance and incentives to find suitable employment quickly. “Only then,” he says, “should tax increases be contemplated. And even at that point, any changes to the UC tax system should be structured in a way—and implemented in a time frame—that causes the least harm to the state’s economy.”
While the Fund insolvency crisis poses a challenge for state policymakers, it also provides an opportunity to take a hard look at the current UC system and make the changes necessary to ensure that it’s fair, cost-efficient, and appropriate for today’s economy. Here are the changes that CBIA recommends.
1. Suitable work
Review the definition of suitability for work to ensure that it reflects the intent of the unemployment compensation system and the realities of the modern economy and encourages individuals to return to work as soon as possible.
Under Connecticut law, unemployment compensation claimants are disqualified from receiving benefits if they are available for, but refuse, suitable work. A relevant component of a job’s suitability is compensation. State law, however, provides only general criteria for determining when a job with lower compensation may be considered suitable work. Consequently, much of the task of defining and interpreting suitable work has been left to the administrative hearing process, and CBIA believes that claimants are often awarded benefits while refusing suitable work.
In contrast, many other states’ statutes actually specify the minimum level of pay or differential of compensation that may be considered suitable for a UC claimant seeking work. And many of these state statutes benchmark the standard of compensation for suitable work at a level far below the standard Connecticut uses—a claimant’s last rate of pay. In fact, several states—for example, Michigan, New Jersey, and Virginia—require UC claimants to consider any work at or above the amount of their UC benefits. In other cases, the level of compensation deemed suitable decreases with the length of unemployment, i.e., the longer someone collects UC benefits, the lower-paying the job he or she is required to accept.
In considering only a claimant’s last rate of pay as a benchmark for compensation, Connecticut law often inadvertently encourages job seekers to refuse suitable work if the wages offered are lower than the claimant’s last or usual rate of pay, thereby unnecessarily prolonging joblessness and slowing our economic recovery. In an economy where nearly 100,000 jobs have been lost and 10,000 more are projected to disappear before the middle of this year, it is not realistic to expect that all displaced workers will readily find jobs similar in pay and conditions to the positions they lost. Indeed, insofar as many of the jobs lost to the current recession in Connecticut may never be replaced, what is deemed suitable work must reflect the new economy and job market.
2. Quits and fires
Improve the state’s unemployment compensation eligibility standards so that they are clear and balanced and compensate only those claimants who have lost work through no fault of their own.
Under state law, employees are not eligible for UC benefits if they leave their job voluntarily and without good cause attributable to the employer, which generally means some change from the original work conditions that has a substantial adverse impact on the employee.
In the case of terminations, Connecticut law dictates that UC claimants are disqualified from receiving benefits if they have been discharged for engaging in willful misconduct in the workplace. Willful misconduct requires a knowing violation of a law, regulation, or employer’s rule or policy.
The interpretation of the statutory language governing quits and fires by UC hearing referees has been problematic for many Connecticut employers, who view the process as unfairly favoring claimants. In addition, a particular source of dissatisfaction has been the fact that, by law, willful misconduct generally does not include violations of an employer’s policy or other action resulting from employee incompetence. Many employers find this area of the law frustrating to the extent that it allows claimants to knowingly render a poor job performance yet still qualify for UC benefits upon termination.
Employers’ frustration is clear from the results of a 2009 survey of CBIA member companies. All 299 employers responding to the survey indicated dissatisfaction with Connecticut’s UC benefits system and specifically cited liberal eligibility criteria as the reason.
“It is unfair that [claimants] should be able to collect if fired due to poor performance,” said one respondent. Another argued that the UC system is “always for the former employee, even when termination is for justifiable reasons with evidence.”
Seventy-five percent of those responding believe there is a need to strengthen Connecticut’s unemployment compensation laws. When asked to identify specific ways that those laws should be modified, respondents recommended strengthening eligibility requirements, the monitoring of employee job-search efforts, requirements related to attendance, and requirements related to misconduct.
“I think it’s imperative that we get back to the original purpose of the Fund—to help people who have lost their jobs unintentionally,” says Marge Hart, director of administration at Hubbard-Hall Inc., a chemical services company in Waterbury. “Many people who find themselves receiving unemployment benefits need to have an incentive to find work. The system should be geared to paying those who have legitimate claims and doing everything to encourage and assist them in their search for work. For their part, benefit recipients must understand that new jobs they find may not involve the same type of work or offer the same pay level as their previous positions.”
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