By the time Colorado does its annual June checkup of the special fund used to pay unemployed workers, the account will likely be empty, and possibly in the red.
Out-of-work Coloradans should be OK, though. They’ll still get unemployment pay because the state, as it’s done in the past, will borrow money from the federal government to pay the claims.
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But unemployment insurance premiums paid by employers will rise sharply in order to refill the Unemployment Insurance Trust Fund — at least 54% and as much as 86% more per employee for a company of five workers, according to an example offered by the state Department of Labor and Employment.
Nearly a half-million Coloradans filed for unemployment in the eight weeks since coronavirus safety measures went into place in March.
“We paid $375 million on unemployment last (calendar) year and we’re seeing that on a monthly basis now,” said Cher Haavind, the agency’s deputy executive director. “I think that’s a good comparison of pre-COVID and where we are today.”
Other states are closer to running out of money. California was the first, taking a $1.1 billion federal loan earlier this month. New York, Texas and six others have been approved for federal loans, according to the U.S. Treasury. Colorado may not go into the red until June or July, but the state’s fund has been underfunded for a while, and prior to the pandemic, there were efforts to increase the reserve. But the prime way to do that is to increase employer insurance premiums and business organizations say that’s the last thing we should do as the pandemic continues.
“All of our priority should be to ensure more employees can keep their jobs,” said Kelly Brough, president and CEO of the Denver Metro Chamber of Commerce. “Any proposal that adds costs right now takes money from employers being able to make payroll.”
Tackling the math
The math behind figuring the increase in premium rates is complicated. But essentially, the rates are based on three things: how much is in the trust fund, whether the fund is solvent and the employer’s “experience rating,” which the labor agency determines based on the company’s history of layoffs and contribution to the trust fund.
The more layoffs, the higher the company’s rate. The lower the cash reserve in the trust fund, the higher the rates for everyone. And when the fund is insolvent, a surcharge kicks in for everyone.
Two things are different in this downturn. Due to a state emergency order, employers that laid off workers due to coronavirus-related issues won’t be individually penalized. And when the state does borrow federal funds, it’ll have access to a 0% interest rate until the end of the year.
And this brings us back to the example of a small business with five employees and how much its premiums will go up. Ryan Gedney, the labor department’s senior economist, described the scenario using the state’s average employee wage of $1,200 per week.
An employer with the lowest premiums currently pays $78.80 per employee each year, while an employer at the highest rate pays about $1,000 per worker.
But add in the expected trust fund deficit fee and the solvency surcharge and those employers will see a 54% or 86% increase in rates for their five-person company next year. That’s an extra $42.80 or $865.40 per employee next year, Gedney said.
“So in the new scenario with the solvency surcharge, you’re looking at $1,872 per employee versus what was close to $1,000 the year prior,” Gedney said.
The cost of insolvency
Colorado’s Unemployment Insurance Trust Fund has run out of money before. It went insolvent in 2010 during the Great Recession. The state borrowed $1.1 billion from the Federal Unemployment Account.
The burden to pay it back wasn’t on the state or taxpayers. Businesses bore the brunt of the insolvency.
“I had members get hit with 200% and 300% increases in their unemployment taxes,” recalled Tony Gagliardi, state director for the NFIB, which represents 7,000 small businesses in Colorado.
NFIB joined a group of other business organizations and local chambers to push for the idea of using a bond to pay off the federal loan. The idea caught on, and in 2013 Colorado issued bonds to finance the federal debt for around $625 million.
“Some of that was to get the fund into solvency, but also to turn off the solvency surcharge,” Gedney said. “That was something we worked on with the employer community. In total, it was around $1.7 billion that we borrowed through a combination of federal loans and the private market.”
Employers paid a surcharge of 20% to 25% until the bonds were paid off in May 2017, according to the 2019 budget report from the state Department of Labor. When the report was issued in December, the labor department staff recommended increasing the taxable wage base beginning in 2021, but the department leadership decided not to push for legislative approval to do so.
In fact last year, because the trust fund’s reserve had improved, premium rates went down a fraction of a percent for all employers.
While no one could have predicted a pandemic would deplete the trust fund of $1.1 billion in four months, the December report noted the very possibility of something doing so: “it will become insolvent within a year under moderate-to-severe recession conditions,” it read.
“We’re right back to where we were. We’re broke,” Gagliardi said. “When those (unemployment insurance) rates go up, it works against the employees because it puts pressure on an employer’s ability to raise your wage.”
State jobless fund underfunded for years
The state trust fund still has roughly $850 million in it, said Gedney, senior economist with the state labor department. He expects that to last until July.
With 451,155 employees filing unemployment claims in the past eight weeks, the trust fund has paid out an average of $85 million a week for the past month. So far this year, it’s paid out $441.5 million.
Separately, the state also processed $63.2 million in benefits for independent contractors, gig workers and the self employed. This group of workers doesn’t dip into the state trust fund. They are paid by the federal government as part of the CARES Act, which provides $600 per week to workers who usually don’t qualify for benefits since they don’t pay for unemployment insurance.
But with continued uncertainty due to the coronavirus ravaging the economy, an economic forecast presented to the state Joint Budget Committee last week put the trust fund’s deficit at $7 million by June 30, the end of fiscal year 2020. A year later, the trust fund is projected to be $2 billion in the hole.
It’s too late to fix the looming insolvency, but there are already plans to address recovery.
State Sen. Chris Hansen, a Denver Democrat, has been pushing to raise the trust fund balance for more than a year. He said it was underfunded by $400 million before the pandemic began because rates hadn’t been adjusted for inflation for three decades.
Right now, employers pay premiums based on the first $13,600 of taxable wages, a metric used since the 1980s. If adjusted for inflation, the number would now be around $28,000.
“If we had done a better job preparing for the next downturn, we should have had about another half billion dollars in reserves,” Hansen said. “That would have gotten us through until the fall and we would have been in a stronger position. It may have delayed the fund being drawn to zero. That is a real thing. We were not prepared going into the downturn.”
Hansen is working on an insurance reform package that he plans to propose when the legislature returns May 26. He doesn’t want to use federal stimulus funds given to the state because he feels there are other areas in the state budget with greater need, like K-12 education, which is being eyed for cuts. His plan would look for immediate fixes to get employers and their workers through the pandemic.
One change would be to clarify the work-share program rules, which allows a company facing layoffs to opt to reduce employee hours instead. The state limits reduction of hours to no more than 40% and the employee qualifies for unemployment benefits to make up the difference.
“The federal government allows a 60/40 split, and the state rules right now only allow a 40/60 split,” Hansen said. “We think we think we can create a lot of additional flexibility for both employers and employees if we align Colorado regs with the federal rules.”
But such changes right now will cost businesses that are already struggling, and face higher unemployment insurance tax bills next year to cover the trust-fund deficit, said Brough, with the Denver Chamber.
“That’s why we support using federal stimulus dollars to help cover some of the costs of this fund,” she said. “This approach would help recovery and allow Colorado’s economy to come back faster and stronger, taking pressure off the unemployment fund down the road.”