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# Monday, February 01, 2010

The U.S economy has been, and continues to be in a "Great Recession."  While many economists are now claiming that the economy has turned the corner and the recession is beginning to fade, the Total Unemployment Rate (TUR) is still hovering around 10%.   This is a normal occurrence when the country is recovering from a recessionary period.  However, the depth and length of this economic disaster is like no other in history with the exception of the Great Depression.

 

It has now been 26 months since the recession officially began in December of 2007.  By comparison, the worst recession in the previous 40 years (1981-1982) lasted only 16 months.  Job Losses are more than double the '81/'82 recession, UI Claims are at an all time high, and the duration of the average claim is around 26 weeks (the highest in recorded history).  But wait, it could very well get worse in 2010 before it starts to get better.

 

Insolvent States

 

All of this has taken a heavy toll on the Unemployment Trust Fund (UTF).  Thirty states have depleted their accounts in the UTF and are taking or currently requesting Title XII loans from the Federal Unemployment Account (FUA).  Below is a breakdown of state borrowing as of January 21, 2010:

 

Alabama

$175,231,403.41

Arkansas

$253,484,708.57

California

$6,700,256,343.45

Colorado

$9,466,584.15

Connecticut

$239,895,065.91

Florida

$1,137,000,000.00

Georgia

$139,000,000.00

Idaho

$130,638,625.22

Illinois

$1,407,739,009.96

Indiana

$1,572,564,697.49

Kansas

-

Kentucky

$623,137,951.27

Massachusetts

-

Michigan

$3,333,882,333.32

Minnesota

$375,632,140.00

Missouri

$527,780,078.39

Nevada

$183,065,311.55

New Hampshire

-

New Jersey

$1,134,957,333.38

New York

$2,417,631,993.59

North Carolina

$1,719,832,029.38

Ohio

$1,857,337,799.00

Pennsylvania

$2,130,454,479.20

Rhode Island

$146,534,383.00

South Carolina

$736,197,781.00

South Dakota

$11,743,900.67

Texas

$1,528,764,140.92

Virginia

$172,723,000.00

Virgin Islands

$9,894,845.08

Wisconsin

$1,026,179,822.02

 

Total

$29,701,025,759.93

Kansas, Massachusetts and New Hampshire have requested approval from the Secretary of Labor to take Title XII loans, but have yet to drawdown their first advance.  Twelve states have borrowed in excess of $1 billion, while NY, MI and PA are over $2 billion.  California leads the way with $6.7 billion.

 

Insolvent Federal Accounts

 

With almost $30 billion in Title XII loans being advanced to the states, the UTF Federal accounts were also depleted during 2009.  There are three Federal accounts in the UTF: 

 

1)  The Employment Security Administration Account (ESSA);

 

  • This account receives 80% of the Federal Unemployment Tax (FUTA) collected by the Internal Revenue Service.
  • Used to fund administration of state UI and ES programs.

 

2) The Extended Unemployment Compensation Account EUCA);

 

  • Receives 20% of FUTA revenues
  • Funds the Federal share of extended benefits and now the EUC08 emergency benefits 

 

3)  The Federal Unemployment Account. 

 

  • Funds Title XII Advances to states that have depleted their state account

With the EUCA and FUA accounts both becoming insolvent during 2009, Congress passed HR 3357, and the President signed it into law, allowing the UTF to drawdown funds "as needed" from General Revenue to continue paying extended and emergency benefits and making interest free loans to states.  The UTF, however, is required to pay interest on these General Revenue loans at the same rate the Treasury pays on the National Debt, approximately three and three eighths per cent.  As of December 3, 2009, the UTF had already taken $18.9 billion in General Revenue loans.

Where to Now?

The US Dept. of Labor is now projecting that approximately 40 states will borrow up to $90 billion dollars before the end of 2012 and states are starting to wrestle with how this will be paid back and how long it will take.  Do they raise taxes?; Do they reduce benefits?; Do they wait for a Federal "bailout?" Different states are taking different approaches. 

The National Association of State Workforce Agencies (NASWA) recently conducted a survey of states regarding solvency issues.  The survey results indicated that approximately 24 states plan to increase their taxable wage base for 2010.  In 17 states (AK, HI, ID, IA, MN, MT, NV, NJ, NM, NC, ND, OK, OR, UT, VI, WA, WY) the taxable wage base is indexed and will happen automatically as a result.  The seven remaining states (AR, FL, IN, NH, TN, VT and WV) passed legislation to raise the taxable wage base.  However, at least two of those states, Fl and IN, are now working on legislation to postpone the implementation of the newly passed tax legislation in order to avoid increasing taxes on employers at a time when the economy is trying to recover.  A large increase in employment tax is feared to prolong the high unemployment rate as employers will continue not hiring or creating new jobs while trying to reduce costs and increase profits.  These states also site the possibility of a Federal Government bailout in the form of relief from repaying Title XII loans as justification for the delay.  My personal opinion is that this probably will not happen because the UTF is borrowing from General Revenue, with interest accruing. Who bails out the UTF and General Revenue Account?  The tax paying public!

The NASWA survey also concluded that 28 states will see an increase in their tax rate schedules in 2010.  While 10 states are already at the maximum rate schedule and would have to pass legislation to increase further, most of the states have automatic increases built in to the experience rating structure when trust fund balances are low.  If there is one thing you can count on, it is that most, if not all, states will see a UI tax increase in 2010.  The NASWA survey indicated these increases will range between 2.5% to 600%.

FUTA Increase?

According to UWC President, Doug Holmes, The House Ways and Means Committee is looking at the possibility of increasing the FUTA taxable wage base to address the large deficit in the Federal Accounts in the UTF.  In my opinion, an increase in the $7,000 FUTA taxable wage base is very likely within the next year and may even be indexed to create more flexibility to increase revenues during recessionary periods.  In addition, increasing the FUTA taxable wage base will require all states to approve a taxable wage base that is equal to, or greater than, the FUTA wage base, thus, improving the stability of state accounts in the process. 

Rett Hensley

Consultant

Monday, February 01, 2010 2:52:11 PM (Central Standard Time, UTC-06:00)  #    Comments [2] -
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