State’s Unemployment Fund Goes Broke

Connecticut’s unemployment insurance fund has become insolvent, which will force the state to borrow nearly $1 billion over the next two years so jobless residents can continue to collect unemployment checks.

The state’s unemployment insurance fund ran out of money Oct. 13, and the state has already borrowed $80 million to make up for the shortfall. By the end of 2009, those loan amounts are expected to increase to $260 million. Through 2012, state officials predict the state may need to borrow up to $900 million.

Connecticut officials expect the state’s unemployment insurance fund to continue to fall short during the next few years. State unemployment insurance premiums — paid for by Connecticut businesses — are not expected to generate enough money to cover jobless claims.

The premiums are projected to generate about $650 million this year, about half of the $1.3 billion needed to cover expected jobless claims, said Carl Guzzardi, tax director for the state Department of Labor.

“It’s the cyclical nature of the business we are in,” Guzzardi said. “This is not something that is unexpected in a recession of this nature.”

Connecticut will keep paying unemployment benefits even though the insurance fund has run out, but will now have to borrow money from the U.S. Department of Labor to make up for the shortfall.

Since the onset of the current recession, Connecticut has lost 85,400 jobs. That number is still expected to rise to more than 100,000. By comparison, Connecticut lost about 159,000 jobs during the 1989 recession and 61,000 jobs during the early 2000 recession.

The unemployment insurance fund last went insolvent in the early 1990s.

Connecticut is not alone in facing an unemployment insurance fund shortfall. Guzzardi said there are 25 states where insurance funds have already gone insolvent, and as many as 15 more are expected to follow suit by the end of the year.

Nationally, U.S. companies shed 190,000 jobs in October, raising the national unemployment rate to 10.2 percent. Although state officials reported 1,000 new jobs in October, the unemployment rate still rose to 8.8 percent from 8.4 percent in September.

Employers Pay

Businesses are subject to two separate unemployment taxes that generate money for the state’s unemployment fund: 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 experience with layoffs. The more layoffs a company orders, the higher its tax.

The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies when the state needs extra revenue to maintain the fund’s target balance.

Higher Taxes Possible

In 2008, the insurance fund paid out $700 million in unemployment benefits but only took in $530 million, which bumped the fund solvency tax to 0.9 percent. In January, the state Department of Labor increased the solvency tax to its legal maximum 1.4 percent.

When Connecticut’s unemployment insurance fund ran out of money in the early1990s, the state issued revenue bonds to make up the shortfall because bond terms and interest rates were favorable at that time, Guzzardi said.

This time around, the state has decided to borrow from the federal government because the stimulus bill allowed the loans to be interest free through 2010.

Guzzardi said the state Department of Labor is working with Gov. M. Jodi Rell’s office to try to reform the unemployment insurance fund so that it doesn’t become insolvent again.

In the next legislative session, he said the DOL will propose making changes to the insurance fund process, including possibly increasing tax levels that employers pay for unemployment insurance.

“We are working all the time to make sure we have an equitable tax system that supports the level of payouts,” Guzzardi said. “We’ve got to do a better job of matching revenues to payouts and we have an obligation to fund the system in the most economic way possible.”

In October, Rell announced that Connecticut’s unemployment rate qualified the state to provide seven additional weeks of benefits to unemployed individuals. Now, the state’s jobless residents can potentially receive 79 weeks of unemployment benefits, Rell said.

Additionally, as part of the stimulus funding, job seekers in Connecticut got a “bump” in unemployment insurance of $25 a week.

“These benefits offer the lifeline we need to help our families weather this economic storm,” Rell said in a written statement. “While I am confident our nation will soon emerge from this recession, until we do recover and begin to create new jobs, we must provide assistance to those who have felt the brunt of this downturn.” 

Connecticut’s Unemployment Insurance Fund Taxes Experience rating tax: • Ranges from 0.5 to 5.4 percent • Set annually based on a company’s past experience with layoffs • More layoffs means higher taxes Fund solvency tax: • Ranges from 0 to 1.4 percent • Applied evenly to all companies when the state needs extra revenue to maintain the fund’s target balance. Both taxes are assessed on the first $15,000 of an employee’s wages.