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As the COVID-19 coronavirus threatens to plunge the national economy into a recession, Connecticut could be looking at costly borrowing, to be paid for by employers, to shore up its unemployment fund in the years ahead.
Unemployment claims have spiked since last week, reaching 10,000 on both Monday and Tuesday. If the trend continues, it could soon eat away at the state’s unemployment fund balance, which stood at about $615 million on Tuesday, according to the state Department of Labor (DOL). The state would seek to borrow money when and if the fund balance fell to about $115 million, DOL spokesman Steven Jensen said.
It depends on the pace of jobless claims in the weeks ahead, but it’s possible solvency challenges could arise within a matter of months, DOL Deputy Commissioner Daryle Dudzinski said Tuesday.
The unemployment trust fund pays for jobless benefits and gets its money from taxes employers remit to the state each quarter.
The potential for higher unemployment taxes down the road is not the most immediate concern for many businesses, which are struggling to assess the potential impacts of the outbreak on their operations and the economy, but those taxes could make an economic recovery more difficult, said Eric Gjede, the Connecticut Business & Industry Association’s (CBIA) vice president of government affairs.
"The difference between this and [the last recession] is going to be determined over the next few weeks,” Gjede said. “Is it going to be a prolonged period of shutdown or a relatively short window of time?”
DOL officials warned Gov. Ned Lamont in late 2018, shortly before he took office, of the risks an economic downturn could pose to the fund.
After the last recession (Dec. 2007 to June 2009), Connecticut’s unemployment rate rose to a high of 9.3% in late 2010. The state subsequently borrowed about $1.2 billion from the federal government to shore up its unemployment trust fund.
Between 2011 and 2015, employers here saw their federal per-employee unemployment tax jump from $42 to $189 per employee.
With its federal loan since paid off and its unemployment rate falling to 3.7% as of January, Connecticut’s fund has grown as there have been fewer benefits being paid out.
The fund has seen its balance rise from $141 million in 2014 to $615 million as of this month.
"Because of the relatively low unemployment rate, we have actually been making some progress,” Gjede said. However, the state is only halfway to where it would need to be, under federal eligibility rules, to tap interest-free federal loans to respond to a potential recession, and it’s unlikely that can change in the coming months.
To qualify, a state fund must have at least one year’s worth of reserves saved, an amount that’s calculated based on the three highest-cost years over the prior two decades. That would equate to a current fund balance of roughly $1.6 billion, according to Jensen.
Connecticut is well short of that mark.
If Connecticut is forced to borrow as it did last recession, the costs would once more fall solely on employers, in the form of the unemployment taxes they remit to the government.
CBIA has pushed in recent years for reforms that would increase the solvency of the state’s unemployment fund, including increasing the earnings threshold at which workers would qualify for benefits.
However, others have argued that employers should have been paying more into the fund all along to account for rising wages.
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