NC Budget and Tax Center, Uncategorized

Forward Financing is Required to Fix Unemployment Insurance Trust Fund for the Long Term

It is a critical time in North Carolina for the unemployment insurance system to be working at its best.  Unemployment remains high, long-term unemployment is at record levels and the state’s jobs deficit has not closed since the official recovery began remaining at nearly half a million jobs needed to make up for those jobs lost and the growing working-age population.

That is why it is so important that policymakers are taking up unemployment insurance financing as was discussed at yesterday’s Revenue Laws meeting.   But it will also be important that they keep in mind the fundamental role of the unemployment insurance system as a protection to the economy–businesses and workers alike.  That will mean pursuing two fundamental goals. First, maintaining the system’s ability to support the economy by ensuring that the wage replacement function of the unemployment insurance system provides support to workers seeking work, contains the potential spiral of negative impacts into the broader economy and prevents further family financial disaster.  And second, establishing “forward-financing”, so that the system can better weather economic downturns by ensuring adequate fund levels to reduce the reliance on borrowing and tax increases to meet benefit payments in downturns.

Proposals to reduce benefits and benefit duration or to pursue only quick fixes without fundamentally and comprehensively reforming the system’s financing are shortsighted and will ripple through the economy.

When workers lose their jobs the financial strain is intense and the modest payment of unemployment insurance is what can keep families from falling into more dire situations.  These modest payments pay utility bills, rent or mortgages and meet the most basic needs of their families and children for food and doctor’s visits.  And in so doing support local businesses and contain broader negative financial outcomes like foreclosure and increased poverty rates.

Unemployment insurance payments are quite modest, just $290 a week, which for a family of three leaves $1100 in unmet needs each month.  This partial replacement of wages puts North Carolina squarely in the middle of states in terms of average unemployment insurance payments.

And that middle of the pack status is true for a number of measures.  North Carolina is not out of line with other states in the country and in fact has put in place accepted standards on the benefit side that allow the unemployment insurance system to serve its role as support to the broader economy. For example, the majority of state’s (35) index their maximum benefit amount to between 50 and 76% of the average weekly wage.

On tax rates, North Carolina actually ranks at the bottom of all states. North Carolina ranks 42nd in its average tax rate on taxable wages at 2.22 percent. This rate is lower than the national average of 3.44 percent. The average employer contribution per covered employee is $336 in North Carolina, which ranks 30th nationally.

Efforts to mimic other south eastern states policies would not fit with North Carolina’s economy.  The intention of the formulas and criteria in state unemployment insurance systems is to reflect the local economy.  Therefore, proposals to reduce the maximum benefit to an arbitrary $350 would not only put NC among the bottom 10 states, it would no longer be tied to wage growth in the state.

Benefit changes are not the path to solving the state’s unemployment insurance system.  North Carolina needs to return to forward financing, an approach that has employers contribute to the unemployment insurance trust fund in good times so that in bad times, when benefit payouts increase and payrolls shrink, funds are available for workers who lose their jobs through no fault of their own.

Our current challenges can be traced back to not just the economic challenges of the past four years but a series of tax cuts to employers in the 1990s that reduced the trust fund balance to well-below agreed upon safe levels before the start of the Great Recession.  In fact, if North Carolina had been financing the system at the average rate of other states, we would have had $2.8 billion by 2009, which certainly would have reduced the size of our debt.  Pay as you go models, as was effectively adopted in NC in the 90s, and temporary quick fixes will not address the fundamental need for forward financing to make the system work effectively and efficiently.

Policymakers should instead be guided by principles that are broadly shared by researchers and stakeholders alike:  achieving adequacy, ensuring full and equitable participation and maintaining the wage replacement function and improving re-employment services for workers who have lost their jobs. The task of stabilizing the unemployment insurance trust fund will take time but it must be undertaken to ensure that North Carolina is better positioned to weather future downturns.


One Comment

  1. Frances Jenkins

    November 11, 2012 at 10:04 am

    What is the complete story? Is it correct a state employee was not doing their job?

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