The unemployment insurance system is built on the very simple but very effective principle of forward-financing. Employers contribute to the fund in good times so that in tough times, when benefit payouts increase and payrolls shrink, funds are available for workers who lose their jobs through no fault of their own and demand is maintained in local economies.
In the mid-1990s, North Carolina’s policymakers enacted a series of tax changes that abandoned forward-financing. These changes brought the state’s unemployment insurance trust fund levels below safe levels proscribed by the best evidence—just before the first recession of the 2000s hit. If North Carolina had required contributions from employers at the national average tax rate from 1990 to 2004, the UI Trust Fund would have had $2.8 billion in 2004, potentially erasing the current solvency issues.
In combination with tax cuts, the sheer length and depth of job loss in North Carolina’s economy and the small number of employers contributing to the system have paved the way to insolvency.