Even with fixes on the horizon, state’s unemployment trust fund is in a precarious position

The state’s unemployment compensation trust fund is going broke faster than anticipated, causing the state to borrow more, and possibly earlier, than expected from the federal government in order to continue to pay benefits to the jobless.

There is even a remote chance that unemployment-related payroll taxes on business — which are already scheduled to more than double over the next three years — might have to increase even higher.

The fund, which stood at $240 million at the beginning of last year, is projected to sink to $11 million at the end of this year. And since the fund is some $16 million lower than the last projection, “we will be lucky to be at more than zero” on Dec. 31, said Department of Employment Security Deputy Commissioner Darrell Gates.

The state had planned to borrow at least $100 million in any case from the federal government, but finishing in the black on New Year’s Eve is more than just a symbolic cause for celebration. If the state is forced to borrow before the end of the year, it has to pay interest on that loan, and pay it back a year earlier. And that, combined with some actions — or inactions — on the part of the federal government might force another tax increase.

“I hope more isn’t needed,” said David Juvet, vice president of the Business and Industry Association of New Hampshire. “I hope this is really fixed. The business community took a significant hit. Our members’ faces go pale when they find out how much additional money this is going to cost them already.”

Juvet’s hopes will probably be realized. Gates said he doesn’t think that any more taxes will be necessary, but that prediction is pinned on a number of assumptions:

• That the economic situation has stabilized and won’t get worse

• That the federal government continues to bear the full cost of extended benefits

• That Washington continues to lend the fund money at no interest

• That there is enough money in the budget to move over to the fund without crippling services when the time comes

‘Grand compromise’

The reason the unemployment trust fund is nearly empty is that assumptions in the past were wrong.

For years, Employment Security had some of the lowest payroll taxes in the nation. That’s because the state had a low unemployment rate, and those who were out of work found jobs very quickly.

This enabled taxes to be kept low. The state didn’t raise the base amount of salary to be taxed — $8,000 — for 14 years, even though salaries were going up. In 1994, that wage base represented 31.6 percent of the average annual wage. In 2008, it represented 17.7 percent.

The state also had a relatively low threshold at which an employer discount was triggered — $225 million. The half-percent discount in the tax rate is a lot larger than it seems, since the tax rate on most employers ranges from a tenth of a percent to 2.7 percent of the first $8,000 of a worker’s wages. Thus, for a new employer with a 2.7 percent rate, the employee discount actually cuts his taxes by nearly a fifth.

The state did its best to keep that threshold, even going so far as to ask some larger employers to pay the tax early so the fund wouldn’t drop below the threshold at the wrong moment.

The problem, said Andrew Stettner, deputy director of the National Employment Law Project, is that state pushed the fund toward its actuarial limits. Yes, it could handle the routine recessions experienced in years past, but it wasn’t ready for an economic crisis like today’s.

“They should have had a surcharge earlier,” said Stettner. “A little bit of money a few years early would have made a lot of difference today.”

To be fair, New Hampshire is not alone. Florida’s trust fund is $4 billion in the hole, and it is already borrowing heavily to keep its fund solvent. Some 16 other states also have begun to borrow and another 40 will be doing so after the first of the year, Gates said.

Employment Security had earlier proposed raising taxes when the fund first started diminishing, but lawmakers wouldn’t hear about it at the time.

“The state didn’t have the political appetite to do it,” said Dennis Delay, an economist with the New Hampshire Center for Public Policy Studies. “We should have seen this coming. It should have been clear to them back in January, but especially after April and May.”

“In our pro-business climate, we may have been erring on the optimistic,” said Lee Nyquist, an attorney who chairs the Unemployment Compensation Advisory Council. “But we had no reason to predict a calamity such as this.”

When the state finally did act, it did so quickly. Employment Security issued a report on the shrinking trust fund in May. And in June, the Legislature passed, without much controversy or publicity, “a grand compromise,” in the words, of Nyquist.

Workers would have to give up their first week’s unemployment check. Those who collect their full benefits would receive that week’s benefits on the back end, but nearly 90 percent of laid-off workers return to work before the 26 — now extended to 72 — weeks are up, so they will never see that first check.

This also will affect employers who — starting Jan. 1 — will no longer be able to send their workers on a week’s furlough with the state picking up part of the tab in an unemployment check. Indeed, according to Gates, furloughs are a key reason the trust fund is dropping faster than expected.

Also as part of the compromise, the Legislature added a half-percent tax surcharge on top of the half-percent that already went into effect. It also increased the tax base from $8,000 to $14,000 in increments of $2,000 per year over three years.

There also are other tax increases, which particularly hit seasonal employers, primarily the construction industry.

All this amounts to a doubling and sometimes tripling of the unemployment tax on companies already struggling to make ends meet in the middle of a recession.

“It is woefully overdue,” said Gates. “But is it going to have a dramatic effect? Of course.”

Sinking funds

The issue has received little coverage outside of the business press. Many employers didn’t even find out about the tax increase until Employment Security sent out a letter on Sept. 23. The letter, however, is a bit technical, and most employers won’t know what the change means to them until they prepare their payroll taxes in March.

Steven Feinberg, a certified public accountant and founder of Appletree Business, a benefits and payroll firm, crunched the numbers and found that a start-up business would see taxes go up 107 percent over three years.

When clients learn about it, said Feinberg, “They all look aghast. But what are they going to do?”

Nevertheless, the tax increases and the essential elimination of the first week’s unemployment check should start replenishing the fund in January. The state still will have to borrow — “no way we could react soon enough to avoid borrowing,” Gates said — but it had planned to start next year.

However, the trust fund is sinking fast. Back in May, the department thought it would have $78.7 million at the end of September and $27 million at the end of the year. Now it projects that the fund will total $62.8 million at the end of third quarter, ending the year at $11 million, a projection that Gates suspects is still too high. He does think the fund will end the year in the black, but just barely — about $5 million.

The state also has a bit of a float up its sleeve: With the New Year’s holiday on a Friday, checks can’t be cashed until Monday and won’t leave the account until Wednesday, Jan. 6, said Gates, sounding like many of those receiving the checks who also are living on the edge of financial collapse.

Either way, the fund is going to have to increase the initial amount borrowed from the feds — from $105 million to $120 million. Altogether, Gates expects the fund will have to borrow some $250 million to $300 million over the course of three years.

If Employment Security does manage to postpone borrowing after New Year’s, it not only avoids interest rates, it doesn’t have to pay back the loan for another year. And that could be crucial, since the federal interest-free period only lasts to 2012.

Gates is hoping that the federal government extends that interest-free period, but Stettner of the National Employment Law Project said he thinks that Congress is going to insist that states tighten up their trust funds rules as a condition.

If New Hampshire doesn’t get the free loan extension, the fund might have to shell out $1.6 million in interest. Employment Security is not allowed to raise the unemployment tax rate to pay for that interest, but it can use the portion now going to administrative costs. Gates said that portion should increase as payroll taxes increase, and by 2012 he will have more than he needs, and that money could be used to pay off the interest.

Most other states are not cutting into their administrative budget to pay the interest, noted Stettner. Instead, they are imposing a one-time across-the-board administrative payroll surcharge (which is allowed, as opposed to an increase unemployment tax rate.)

Interest-free borrowing isn’t the only federal program that may expire. Washington is now picking up the tab for all benefits after 26 weeks to the maximum extended benefit of 72 weeks. However, as things stand now, that deal will only continue on the last 12 weeks for those states with an unemployment rate of 8.5 percent. New Hampshire’s unemployment rate is currently 6.9 percent.

U.S. Sen. Jeanne Shaheen, D-N.H., is backing a bill to extend it to all 50 states. If that fails, New Hampshire might have to increase its tax rate by another half a percent.

Finally, Employment Security’s projections are based on the economy remaining relatively stable over the next few years, and picking up by 2012. Thus far, the number of new claims has stabilized to 1,600 a week, Gates said, but those involved with the trust fund are reluctant to make any firm predictions of the future.

“This is unprecedented,” said Nyquist. “We never thought the fund might not be enough. But we never thought Lehman Brothers was going to collapse either.”

Bob Sanders can be reached at bsanders@nhbr.com.