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Even after the longest peace-time expansion, the Kansas unemployment insurance fund is below the “threshold of
solvency” recommended by the Advisory Council on Unemployment Compensation (ACUC) in 1995, according to a recent report from the National Employment Law Project.
The report Beyond Boom and Bust: Financing Unemployment Insurance in a Changing Economy
by Marc Baldwin, Ph.D. questions the level of preparedness among the states as the US economy shows signs of slowing.
Among the key findings are:
- In 2000, UI taxes as a percentage of total covered wages were lower than any time in the history of the UI system.
- Although the UI system should build reserves during economic expansions and spend them down during recessions, many states have
deeply cut taxes and endangered their reserves. Tax cuts and declining tax rates have taken over $47 billion dollars out of the UI system between 1994 and 2000.
- Unemployment insurance taxes peaked at 1.4 percent of wages in 1978, falling to less than half that at .54 percent in 2000.
- Only about 40 percent of the unemployed receive UI benefits in the United States. A combination of expanded financial capacity
and improved access is needed to ensure that the UI safety net functions adequately in the next recession, especially for low-wage, part-time and women workers who are least likely to receive UI under
current programs.
- But if the economy is hit with a more severe recession, the trust funds could be rapidly depleted. In 1982, almost half the states (22) had to borrow funds to pay unemployed workers
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In contrast to Kansas, thirty states are currently above the recommended solvency threshold. The threshold is based on
one of three measures of the adequacy of unemployment trust funds. The Average High Cost Multiple is based on the average of the three highest annual levels of Unemployment Insurance benefits that a state
has paid in any of the previous 20 calendar years. Multiplying the ACHM by 12 tells, roughly, how many months of benefits could be paid if a state experienced a recession like its most recent deep recession.
Nationally, the unemployment funds have increased from about 8 months in 1992 to 11 months at the end of 2000. The ACHM for Kansas is 0.9, for Missouri 0.6, and Oklahoma 1.4.
But if the economy is hit with a more severe recession, the trust funds could be rapidly depleted. In 1982,
almost half the states (22) had to borrow funds to pay unemployed workers.
A second test of adequacy, the High Cost Multiple, tells how large current reserves are relative to outlays in the
year since 1958 with highest benefit outlays in a state. In 2000, the national HCM was .64 translating into about 8 months of benefits at 1975 recession levels. The highest state reserves by this measure were in New
Mexico (2.4). Twelve states had HCM’s equal to or greater than 1.0. The HCM for Kansas was slightly above the national average at 0.7, equivalent to just over 8 months of benefits at 1975 recession
levels. The HCM for Missouri was 0.4, equivlaent to 5 months of 1975 benefits. Oklahoma’s HCM was 1.3, equivalent to 16 months of 1975 benefits.
A third measure comparers trust to payrolls. This measure is dollars in each state trust fund divided by the dollar value
of all payrolls covered by unemployment insurance in the state. It is expressed as a percentage. It is the highest possible threshold of solvency. In effect, it evaluates trust fund reserves relative to complete
wage insurance. It answers the question: how does the state trust fund compare with the maximum possible demands from a wage insurance system? At the end of 2000, the US average was 1.5 percent, meaning state trust
funds could replace one-and-a- half percent of all wages. Reserve ratios varied from 4.1 percent in Vermont to less than one percent in Alabama, Minnesota, Missouri, Nebraska, New York, North and South Dakota and
Texas. The reserve ratio for Kansas was 1.4; for Missouri 0.7; and 1.8 for Oklahoma.
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National Employment Law Project
55 John Street, 7th Floor New York, NY 10038 (212) 285-3025 (212) 285-3044 (Fax) nelp@nelp.org www.nelp.org
Beyond Boom and Bust: Financing Unemployment Insurance in a Changing Economy
Marc Baldwin, Ph.D. April 2001
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