Minnesota’s unemployment fund: trouble ahead?


Minnesota’s unemployment rate is going up. The unemployment compensation trust fund will most likely go into deficit during the first quarter of 2010, according to Lee Nelson, the Chief Attorney for the Department of Employment and Economic Development (DEED).

New York Times, 12/15/08: States’ funds for jobless are drying up NYT graphic shows MN funds drying up within eight months.

The October seasonally adjusted percentage of unemployed Minnesotans is 6.0%, up from 4.6% in October 2007, according to the Department of Employment and Economic Development (DEED). In October, statewide claims increased by 31.1% from a year ago.

Minnesota’s seasonally adjusted unemployment rate for October rose one-tenth of a percentage point to 6.0 percent. This was driven by an increase of 1,900 in the number of unemployed people.

The national unemployment rate rose four-tenths of a percentage point to 6.5 in October. Minnesota Department of Employment and Economic Development

John Bergland, a researcher for DEED, said that a one percentage increase can equal up to $200 million in increased unemployment compensation paid out per year. The increase in Unemployment Insurance (UI) costs means that the trust fund that covers these benefits is running out of money.

In the 2008 fiscal year, which ended on June 30, UI dispensed $800 million, or about $200 million per quarter, according to State Auditor Brad White. In FY 2007, the payout was $736 million. Nelson said there is currently around $550 million in the Minnesota UI trust fund.

In FY 2009, ending June 30, 2009, Minnesota UI is projected to dispense more than a billion dollars. The state will receive approximately $900 million next year in projected unemployment tax revenue.

When the Minnesota UI trust fund runs out of money, it will borrow from the federal trust fund automatically on a daily basis, according to Nelson.

When Minnesota begins to borrow from the federal trust, it will have to pay interest. When that happens, the corporate unemployment rate increases automatically, according to Brad White.

How does unemployment insurance work?

Employers pay an unemployment compensation insurance amount to the state, and that amount is deposited in the unemployment insurance trust fund. Unemployment compensation benefits are paid from the trust fund. The trust fund also earns interest, paid by the federal treasury.

The amount that employers must pay as unemployment insurance premiums is set by a formula that takes into account the specific employer’s unemployment claim history and the overall amount that the state needs to collect in order to be able to pay benefits.

The UI system has been in place since 1936.

On November 21, a new emergency federal extension in unemployment benefits was signed into law. This new extension adds an additional seven weeks of benefits. In Minnesota, regular benefits are payable for 10 to 26 weeks (depending on individual employment history). The first federal Emergency Unemployment Compensation, which took effect in June 2008, extended benefits for up to an additional 13 weeks.

The federal unemployment trust fund is running out of money, too, and even faster now that benefits have been extended. Nelson said that if the federal fund runs out of money, it will borrow from the national treasury, as it did in the mid-1980s.

“The UI system is built to recover sometimes when the unemployment rate goes up quickly,” said Nelson. He said that the trust fund has gone into deficit in every recession this state has had. “The question is,” said Nelson, “How fast will it go into deficit and how long will it take to recover?”

Nelson said that the deficit will not be as bad as the one in 2002.
Although the dollar amount of payouts is larger, the revenue from taxes is over $900 million, which is substantially more than in 2002.

The commissioner, the Governor’s office, and the state legislature will ultimately have to decide whether more action is needed than using Federal funds until the unemployment rate drops.

State Representative Tom Rukavina, who chairs the Minnesota House Higher Education and Work Force Development Policy and Finance Division, said he is waiting to see DEED’s estimates in the next couple of weeks before making a decision. “That fund is in a lot of trouble I guess,” Rukavina said.

Officials are paying very close attention to the economic situation.

“Part of the problem” Nelson said, “Is that you have to do something now to impact 2010 and 2011.” Nelson said that DEED officials analyze data on a weekly basis, looking at factors such as whether the actuals that come in are different from the projected outcomes. The main worry, Nelson said, is that “our projections may be too optimistic.”

One possible option would be to put the state credit on the line in a state bond issue. Nelson said that is not a good idea because although the interest rate might be slightly better, the state has to be the guarantor of the bond.

The state could also adjust employer taxes to help offset the costs of unemployment benefits, either through simple surcharges or through changes in the rate structures. A surcharge would increase all employers’ taxes. A change in rate structures could impose higher taxes on those companies that have more frequent layoffs.

Whether there will be an adjustment in taxes is still yet to be determined. Nelson said that it is very unlikely that there will be any cuts in benefits. “”There’s no interest in balancing things on the backs of the unemployed,” Nelson said.

Neither Nelson nor Brad White believe it is likely that tax rates for employers will be increased, though the option is being discussed.

“The intent is to keep the tax stream somewhat stable,” said White. “It ebbs and flows… but the fund has a sizeable balance.” He notes that there is already a clause in place that increases the corporate unemployment tax rate when the state fund begins borrowing from the federal trust fund.

Andrew Stettner, from the National Employment Law Project (NELP) said that the main problem is that states should have increased employer rates when the economy was good. While he said that Minnesota is not one of the worst states, it’s not one of the best either.

In short, 19 states make up a group of nearly insolvent or marginally solvent states. In comparison, 20 states have 24 months of average benefit payments or more in their current reserves. (Report of National Employment Law Project – Source: Labor Department, Treasury Department)

According to NELP reports, the first tier of states that are in danger of insolvency are California, Michigan, Missouri, New York, Ohio, South Carolina, and Wisconsin. Minnesota is in the second tiered group. Stettner said that if Minnesota borrows from the federal government in the middle of the year, and pays it back at the end of the year, that’s okay, but if they can’t pay it back at the end of the year, it’s a problem.

“I don’t think taxes need to get increased tomorrow,” said Stettner, but he points out that states shouldn’t wait until they are in the red to start talking about it.

Nelson said that Minnesota did a little bit better in October than was projected, but he and other officials are still looking at the situation month to month. Nelson said: “It’s not an exact science.”

While Representative Tom Rukavina’s current position is to “wait and see,” he said that the bigger problem is that “we’re look at a billion dollar deficit. And if you have to cut, as Governor Tim Pawlenty wants to do, are you putting more people on unemployment?”

Rukavina said that as government programs get cut, the unemployment rate is just going to get higher and higher. “I want to create jobs with government money, not take away jobs,” he said.

Sheila Regan is a theater artist based in Minneapolis. When not performing or writing, she serves as educational coordinator for Teatro del Pueblo.