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continued from page 1 Connecticut's UC crisis
3. Claimant job-search effortsStrengthen the unemployment compensation system’s audit functions to make sure that people receiving benefits are actively seeking meaningful work and to safeguard the UC Trust Fund from being unnecessarily depleted. Connecticut’s unemployment rate is currently 8.2%, and the state will continue to shed jobs if the economy does not improve soon. As a high unemployment state, Connecticut is one of several states paying a total of 99 weeks in UC benefits, and the average UC claimant here is expected to be jobless for six months or more. As the rate and duration of joblessness increase, so should our concern for incentivizing workers to return to suitable work as soon possible. Therefore, the DOL must enhance its efforts to ensure that UC claimants are actively seeking work. This can be achieved by increasing the quality and frequency of claimant contacts, providing greater assistance to claimants in their job searches, and partnering with other public and private agencies to improve job prospects for UC claimants. The tax side: how the system is fundedThe unemployment compensation (UC) taxes that Connecticut employers pay to finance the Fund have two main components: employers’ taxable wage base and employers’ experience rate. The taxable wage base is the amount of wages on which employers are required to pay UC taxes. Wages earned above the base are not subject to the UC tax. In Connecticut, employers pay quarterly UC taxes on the first $15,000 in wages paid per employee each year. The experience rate determines what percentage of taxable wages an employer pays in UC taxes. It is based on an employer’s claims experience—the amount of benefits actually paid to an employer’s former workers. Established on a calendar-year basis, the experience rate may range from a statutory minimum of 0.5% to a maximum of 5.4%, depending on an employer’s actual experience. The amount an employer pays into the Fund, therefore, is calculated by multiplying the total of the employer’s taxable wages by the employer’s experience rate. Additional taxes and assessmentsWhen the Fund balance drops below the reserve goal, Connecticut employers are required to pay additional taxes to replenish the fund or repay loans. These include the solvency tax (or fund reserve tax), which is a flat tax assessed on all employers as a percentage of their taxable wage base. Each year, the DOL sets the solvency tax rate based on what’s needed to bring the Fund balance back up to the reserve goal. By law, the annual reserve goal is 0.8% of total wages paid to workers by contributing employers during the preceding fiscal year. The solvency tax rate can range from 0% when the Fund’s reserves are at goal level to 1.4% during times of insolvency. In 2009, Connecticut employers paid the maximum rate of 1.4% and will have to keep paying a solvency tax until the Fund’s reserve goal is reached. Where that goal is set in the future remains a question (see below). Under federal law, employers may also be subject to a special assessment to pay back federal unemployment compensation loans, including interest. When the Fund became insolvent in the early 1990s, employers in Connecticut were hit with special assessments to pay off interest costs for the rest of the decade. Not surprisingly, companies in the state will be facing a special assessment this time around too, but it won’t come until July 1, 2011. That’s thanks to a provision in the federal stimulus legislation that waives interest on all states borrowing for unemployment funds through the end of 2010. Structural changes being considered by the DOLIn response to the Fund’s insolvency, the Connecticut Department of Labor is proposing significant structural changes to the state’s UC tax system. One measure under consideration is an increase in employers’ taxable wage base to $20,000 in 2011, followed by $1,000 increases each year through 2017. Such a move would ultimately raise the taxable wage base to $26,000. “That should be a red flag to the business community,” says Kia Murrell, CBIA assistant counsel and labor law specialist. “Long-term phase-ins of state taxes and fees have a way of becoming permanent annual increases.” In addition, policymakers should be cautious about increasing Connecticut’s taxable wage base given that key competitor states have wage bases below our current rate. These include California, Florida, South Carolina, New Hampshire, Virginia, New York, Ohio, and Massachusetts. Moreover, no other state currently considering an increase in its taxable wage base is contemplating a base higher than $14,000. Increasing Connecticut’s taxable wage base to $26,000 would make it the eighth highest in the nation. An increase of that magnitude could have a dramatic impact on individual companies, says Doug Devnew, vice president of finance and administration at TRUMPF Inc. in Farmington. “Companies that have utilized the shared work program or have had layoffs or furloughs in 2009 will see a tremendous increase in their payment into the Fund in 2011 and beyond. The compounding effect of a higher experience rate combined with a drastic increase in the taxable wage base could result in a fivefold increase in UC taxes for many Connecticut firms.” The DOL is also considering an increase in the Fund reserve goal from the current $626 million to $1.1 billion. The reserve goal is used by states to determine the ideal level of funding needed to withstand future cycles of unemployment and other economic conditions affecting their UC trust reserves. Increasing the Fund reserve goal would mean that Connecticut employers would be paying the state’s maximum solvency tax rate—currently 1.4%—for a much longer period than would otherwise be necessary. “There are dangers in setting the reserve goal too high,” says Murrell. “First of all, it increases the tax burden on employers, which means they have less money for growing their businesses and adding jobs to the state’s economy. As everyone knows, Connecticut businesses are already struggling to survive and compete. Making it more difficult for them to invest in the state and grow at a time like this will not help our economic recovery. “The second danger is that setting the reserve goal too high may create a surplus, which could leave the Fund vulnerable to other state spending, especially during recessionary times.” History supports Murrell’s point. Although federal and state law provide that payments into the Fund may be used only for unemployment purposes, the term unemployment purposes in the past has been broadly interpreted by state legislators to justify routing money from the Fund for uses only marginally related to the payment of unemployment benefits. Given the serious concerns surrounding the DOL’s tax proposals, CBIA is currently evaluating several alternatives, including the following: • Increasing the taxable wage base in a more prudent manner The negative economic impact of increasing the tax burden on employers makes it critical that the DOL take a cautious, measured approach when considering any changes to the UC tax structure. Any moves that make it more difficult for employers to create jobs and invest in the state will hinder their ability to grow their way out of the recession and will slow Connecticut’s economic recovery. In solving the Fund insolvency problem, the state’s first priority should be to restore fairness and cost-efficiency to the UC system by adopting more reasonable, productive standards for suitable work; ensuring a fair interpretation of unemployment insurance eligibility requirements; and stepping up efforts to assist claimants in returning to the workforce as quickly as possible.■
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