Unemployment insurance is a safety net for laid-off workers. But with nearly 100,000 people filing for benefits, Connecticut’s unemployment trust fund went bankrupt on Oct. 13.
Over the past two months, Gov. M. Jodi Rell has sounded alarms and written Connecticut’s Congressional delegation twice, asking them to help get the federal government to extend its interest free loans past the 2010 expiration date to help maintain the fund.
So far Connecticut has borrowed $80 million and plans to borrow an estimated $250-$260 million before the end of 2009. By the end of 2012, state officials say the state will need to borrow $900 million in order to keep the unemployment fund solvent.
But Connecticut isn’t alone. There are 25 states where insurance funds already are insolvent and 15 more may follow before the end of the year, Carl Guzzardi, the Department of Labor’s tax director, said Monday.
Guzzardi says the Department of Labor is working closely with the legislature and the governor to make sure the unemployment fund is solvent in the future. But Guzzardi made it clear Monday that the department has not proposed legislation to address the issue.
What will this mean for employers?
At the moment nothing, Guzzardi said.
He explained that businesses are subject to two unemployment taxes. One is the experience rating tax, which is based on an employer’s past experience with layoffs. The second is the fund solvency tax, which is applied evenly to all companies and is currently at it’s maximum rate of 1.4 percent.
Guzzardi doesn’t expect that tax to decline in the near future.
It’s the possibility it could increase that worries House Minority Leader Lawrence Cafero, R-Norwalk.
In a phone interview Monday, Cafero said it may not be a formal proposal, but there are proposals out there calling for an increase on the rates businesses and employers pay into the unemployment fund.
The informal proposals Cafero has seen call for increasing the base wage used to calculate the experience rating tax, which means employers may see their taxes per employee double by 2012. The second proposal involves the fund solvency tax and changes the average amount of the overall fund balance using the three highest years of benefits paid out over the past 20 years.
Cafero and his Republican colleagues toured the state this summer on the heels of a proposal to implement a 10 to 30 percent surcharge on business profits. On the tour Cafero said they heard from small manufacturers who talked about having to layoff workers that they consider “family” if that tax was able to affect small businesses. In the end the tax ended up applying only to businesses making $100 million or more in profits per year.
He said the proposed changes to the unemployment taxes will have the same affect on businesses. He said if it costs small businesses $50,000 to $60,000 more a year they will have to layoff another person or close their doors.
Instead of increases taxes to make the fund solvent, Cafero suggested changing the paradigm and cutting spending elsewhere to find the money for the fund.
Sen. Minority Leader John McKinney, R-Southport, agreed with Cafero that the tax does not have to be replenished simply by increasing taxes on businesses. He said increasing taxes on businesses is only going to exasperate the problem and force businesses to lay off more workers.
“We need to call upon our federal legislators to act and help the states out,” McKinney said. “This would be a good use of federal stimulus dollars.”
Meanwhile, Rell warned Connecticut’s Congressional delegation in October that the state will have a hard time finding the money to repay these interest-free loans that expire in 2010.
“Given the length and severity of this economic crisis, as more workers continue to exhaust their rights to regular unemployment compensation benefits, most employers will be unable to pay the costs associated with these federal loans,” Rell wrote. “In fact, repayment obligations will likely place such a financial burden on employers that they will be forced to layoff workers, thus further exacerbating our economic downturn.”