State lawmakers are once again debating a long-term fix to Connecticut's insolvent unemployment insurance fund that could have employers paying an elevated fund solvency tax rate for another decade.
A proposal recently approved by the Labor and Public Employees Committee would nearly double the reserve level of Connecticut's unemployment insurance fund to $1.2 billion, which, officials say, would allow the state to build up an adequate buffer during good economic times to minimize the need for borrowing during recessions.
The bill has been proposed by the state Department of Labor as a fix for Connecticut's unemployment insurance trust fund, which went bankrupt in 2009 as a result of the state's high jobless rate and resulting unemployment insurance claims. Connecticut has borrowed $797 million from the federal government so far in order to continue to pay out jobless benefits.
To prevent future fund insolvencies, which have occurred during past recessions, state officials want to raise the trust fund's reserve level from $626 million to $1.2 billion, which equals the average of the three highest years of unemployment benefit payouts in Connecticut over the past 20 years.
The legislation would accomplish that by keeping the fund solvency tax — one of the two taxes employers pay to fund jobless benefits — at its current highest level of 1.4 percent for the foreseeable future, likely at least through the rest of the decade.
"When times are good, you need to build the reserve to a higher goal," said Carl Guzzardi, tax director for the state Department of Labor.
Guzzardi said building a larger reserve would minimize the need for borrowing during recessions, which is significant because the state's businesses, which are solely responsible for paying unemployment insurance benefits, must pay interest on those loans.
Connecticut companies, for example, are being hit with a second $30 million special assessment in 2012, just to pay interest on the federal loans received so far. That equates to an extra $25 tax per employee.
Additionally, in order to begin to repay principal balance on the loans, Connecticut employers were hit in January with an automatic increase in federal unemployment insurance taxes. That tax rate was originally 0.8 percent of the first $7,000 of wages for each employee, but it will increase by 0.3 percent on an annual basis until the loan is fully repaid.
Over the past 70 years, Guzzardi said, the average recession in Connecticut has resulted in payments of about $1 billion in jobless benefits per year, which far outpaces the state's current maximum unemployment fund reserve of $626 million.
The state's business community is not opposing the measure despite the prospects of a prolonged elevated tax rate.
Kia Murrell, a lobbyist for the Connecticut Business & Industry Association, said she recognizes the need to fix the state's broken trust fund. There is also pressure coming from the federal government, which passed a law in 2010 that requires states to have a trust fund reserve that enables it to pay benefits at recessionary levels for one year, or risk losing the ability to obtain interest free loans.
Connecticut's proposal, which is now awaiting action in the House, is palatable, Murrell said, because it builds the reserve slowly over time, rather than doubling it in just a year or two. That will ease the pressure on employers.
It also doesn't create a new tax or even increase the tax rate being paid by employers. That's another positive, Murrell said.
In Connecticut, businesses are subject to two separate unemployment taxes: the "experience rating tax," and the "fund solvency tax." Both are assessed on the first $15,000 of an employee's wages.
The experience tax ranges from 0.5 to 5.4 percent and is set annually based on a company's past history with layoffs.
The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies. The tax level is adjusted when the state needs extra revenue to maintain the fund's target balance. It's currently at its highest level.
Guzzardi said he projects the fund solvency tax will have to stay at its highest level until at least 2018 just so the state can pay back funds it has been borrowing from the federal government and to attempt to reach the existing $626 million reserve goal.