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When the notice about higher unemployment insurance premiums arrived this month from the Colorado labor department, business owner Jim Noon said he was shocked. 

“The surcharges all said zero,” said Noon, who owns Centennial Container in Denver. He remembered how employers’ premiums  doubled and even tripled more than a decade ago as the state recovered from the Great Recession. “I was like, ‘Why are the surcharges zero? Are they just going to surprise me with it later?’”

The short answer is yes. 

A more complex one is that efforts have been in the works for more than a year to postpone the fee. But how those and other extra fees will be tacked on to employer bills still isn’t 100% certain. Last year, lawmakers delayed the solvency surcharge that kicks in when the state’s unemployment insurance trust fund falls below a certain level. 

Jim Noon poses for a portrait on Dec 14, 2021, in Denver. Centennial Container, in business for its 37th year, processes and resells shipping boxes and packing materials. (Olivia Sun, The Colorado Sun)

The trust fund, which pays benefits to laid-off workers, had run through its $1.1 billion reserve six months into the pandemic, causing the state to borrow $1 billion from the federal government. Employers are responsible for refilling the trust fund and paying back the loan. And the surcharge is usually how that’s done. 

But the state’s approach to replenishing the trust fund is very different this time, just as the pandemic recession is very different from the Great Recession. By delaying the surcharge for two years until 2023, employers don’t have to cough up $350 million — at least not yet. There’s also hope that a strong economy along with federal stimulus money and raising the taxable wage base for unemployment premiums will fill the trust fund up faster than last time. 

“It’s dramatically different now,” said Loren Furman, president and CEO-elect of the Colorado Chamber of Commerce. “In 2009, it was a typical recession. In 2020, nobody was anticipating a pandemic, that the state government would shut down businesses. When the government forces businesses to shut down, of course they’re going to have to lay off workers. … Employers should never be held responsible for the decisions that were made in response to the pandemic.”

Nearly every employer will see some sort of rate increase come January. But it may not be that noticeable to some companies. 

But that worries Noon. By his calculations, the annual unemployment insurance premium will rise by $60 to $70 to about $130 for each of the 14 people who work at Centennial Container. He recalls paying up to $300 per employee during the Great Recession. 

“I’m not going to get upset about an extra $60 per year per employee,” Noon said. “But if all of a sudden in 2023, we’re hit with a surcharge that adds $5,000 per employee, that’s an entirely different conversation. … The way it looks right now on the paper I have in front of me, it looks like we have no shortages, there’s not going to be a surcharge and everything looks terrific. I happen to know that the federal government is going to want their billion-plus dollars back and the fund is virtually bankrupt.”

A less shocking bill in 2022

What has been sorted out is 2022. Two changes will increase insurance payments in January — though neither have to do with the billion-dollar loan.

The first is rates are rising because the trust fund was empty on June 30, the date of the annual health checkup. By state statute, that alone means Colorado employers shift to a higher rate. Colorado employers will now pay the highest rate possible (here’s the rate schedule — we’ll be in the far right column in 2022). 

2022 increases
⏺Rates increase because Colorado is now on the highest tier of insurance rates. Depending on a company’s history of layoffs and job cuts, rates are going up 5.6% to 7.8%. 
Amounts also increase because employers must pay insurance on an employee’s first $17,000 of pay, up from $13,600.

That means annual premiums are moving a bit higher, depending on an employer’s history of layoffs. Companies currently pay between 0.71% and 9.64% of an employee’s wage into the trust fund. That rate will increase to between 0.75% and 10.4%.

Despite the increase, 76% of employers still will have insurance rates below 2% and that has a lot to do with a pandemic benefit that doesn’t count COVID-related layoffs against companies, said Ryan Gedney, senior economist with the Colorado Department of Labor and Employment. 

Unemployment insurance rates are going up for Colorado employers in 2022 due to a depleted unemployment insurance trust fund. But most companies will pay a rate of less than 2%. That’s a larger portion of Colorado’s employers then in 2021. (Colorado Department of Labor and Employment)

The second reason is that all employers must start paying insurance on the first $17,000 of an employee’s salary. Last year, the base was $13,600. So this, too, will have employers paying more money per worker even if insurance rates don’t budge.

This translates into 34.4% higher insurance payment for a company with 10 people who make at least $30,600 a year. We’ll call it Company X and use them as an example in this story. 

Company X is a typical employer with few layoffs in its history so it has an “experience rating” of +6, which is the median company rating in the state. Companies lose points when they lay off workers, resulting in a lower “experience rating” and higher insurance rates. Those with the worst layoff history have experience ratings of -25. The best are at +20 or more.

The pandemic was brutal to Company X, and while it now employs 10 people, it laid off several more last year. However, COVID-related layoffs will be ignored forever and not count against the experience rating, thanks to last year’s Senate Bill 207.

“That’s something that did not happen during the Great Recession,” Gedney said. 

For Company X, its new insurance rate will be 1.86%, up from 1.35%. That’s not a huge hike. But because it’s now paying insurance on $17,000 of a worker’s salary, insurance costs will grow 34.4% to to $3,162 next year, from this year’s $2,352.

Colorado State Senator Chris Hansen (D-31st Dist.) leads the Senate Appropriations Committee on the first day of Colorado’s 73rd legislative session at the Colorado State Capitol in Denver on Jan. 13, 2021. (Andy Colwell, Special to The Colorado Sun)

The change in the wage base also comes from the aforementioned Senate Bill 207, sponsored by Sen. Chris Hansen, a Denver Democrat. Hansen has been trying to increase the wage base for years because it wasn’t keeping up with inflation. By the time the pandemic began, the trust fund had $1.1 billion. It really needed to be at $1.5 billion. By raising the base wage on which unemployment insurance is calculated, employers pay more per worker and that replenishes the fund faster.

“We went for decades without changing the wage base so that it stayed constant with real terms. That is the root of the problem,” Hansen said. “This puts us on a sustainable path.”

The new law increases the base wage every year until 2026, when it will be at $30,600. After that, the base increases depending on the change in annual wages. Here’s what that will look like: 

What’s going up in 2023

If laws don’t change, employers’ costs for unemployment insurance will go up again in 2023. Insurance rates won’t change, but the wage base increases to $20,400. 

2023 increases
⏺ No change in rates since they’re already at the highest level
⏺ Taxable wage base increases to $20,400 per worker
⏺ The UI trust fund solvency surcharge scheduled to start
⏺ Colorado loses its credit from the Federal Unemployment Tax Act and employers will start paying $63 in FUTA per employee per year, instead of $42.

The trust fund solvency surcharge is also scheduled to kick in in 2023. And because Colorado is expected to still have a federal loan balance, employers lose a special credit from the Federal Unemployment Tax Act, which can reduce taxes. FUTA jumps to $63 per employee per year, from $42. CDLE said the higher FUTA rate takes effect in 2022 but isn’t paid until January 2023.

THE MATH: The Federal Unemployment Tax Act rewards states that provide unemployment benefits. Instead of a 6% tax on an employee’s first $7,000, employers get a 90% discount. The FUTA rate drops to 0.6%, or $42 per employee. But if the federal loan is outstanding on Nov. 10, 2022, the credit is reduced 0.3% — or 0.9%, which is $63 — and continues each year until the loan is repaid. 

For Company X, insurance costs will go up to $3,794 in 2023 solely due to the base wage increase. There’s also an additional $765 to cover the trust-fund solvency surcharge. And losing the FUTA credit means employers will be paying $63 per employee, instead of $42. 

In total, Company X’s unemployment tax bill would be  $5,399 in 2023, up 42.4% from the prior year and nearly double from 2021.

About that billion dollar loan

Between March 29, 2020, and Dec. 4, the state paid $3.4 billion in unemployment benefits to workers whose employers paid into the trust fund. This excludes gig workers and the self-employed, who were paid from federal relief funds. 

While the state labor department battled unprecedented levels of fraud in the pandemic, the vast majority of the $30 million in confirmed fraud was paid within the federal programs, which employers are not responsible for. A recent state auditor’s report found that 81% of likely fraud to dead or incarcerated users were in the federal Pandemic Unemployment Assistance program, which covered gig workers and the self-employed.

But about one-third of benefits paid since the pandemic began was covered by the federal loan, which was interest free until September. That loan was at $1,014,167,918.51, as of Dec. 9

Gov. Jared Polis took all of this into account when he proposed his budget for 2022. His plan is to take $500 million from the general fund to pay down the loan and also replenish the trust fund. And he wants the state legislature to take $100 million from the American Rescue Plan Act and put it into shoring up the trust fund. Both must be approved by the legislature.

In the best-case scenario, the trust fund gets $600 million and Colorado’s recovery continues to be strong. The surcharge would turn off in 2026, leaving just three years for employers to pay that extra fee. In a weak economy, it would take four years. But with no government help, the trust fund would continue to charge a solvency surcharge possibly until 2028, though Gedney said he didn’t model it that far into the future.

“This forecast is assuming there’s no injection of federal money,” Gedney said. “You can see that if we do have ARPA money injected, it could make a big difference. If it’s $500 million or $600 million, that’s really helpful to paying down the loan balance. … The ARPA money gives you that extra cushion.”

For Company X, a strong economy means fewer unemployment insurance fees. If the surcharge is eliminated by 2026, Company X’s annual payment drops 13.5% to $5,316 for its 10 employees.

Beyond 2023

Despite high unemployment in the past two years, Colorado employers are paying more money than ever to workers. The amount of total wages paid is expected to grow 3.6% this year to $145 billion, up from 2020’s $139.9 billion. That’s a much slower growth rate than past years but hey, it was a pandemic!

And because of the higher wage base, the state labor department estimates employers will contribute $650 million to the trust fund in 2021. Next year’s total wage growth is expected to be 5.5%. At that rate and if the economic recovery remains strong, the trust fund is forecast to return to its pre-pandemic balance by 2025.

Future premiums will also go down as the trust fund is refilled. That could start in 2025 or 2026, depending on how the economy recovers, according to CDLE estimates. And the FUTA credit is expected to return in two to three years because, presumably, the $1 billion loan will be repaid.

As for the solvency surcharge, the trust fund just needs to reach what is called a “reserve ratio” of 0.7% in order to go away. The ratio is the trust fund’s balance divided by total wages. It’s currently negative. Based on rising total wages in Colorado, Gedney estimated that even without government aid, the trust fund will be at more than $1.2 billion by June 2025 and the surcharge would drop off in the following year. 

A fee is added to employer’s insurance premiums when the state’s unemployment trust fund falls below a reserve ratio of 0.5%. That happened in June 2020, when it fell to 0.3% because the trust fund paid out enormous amounts of jobless benefits in the pandemic. But the fee, called the solvency surcharge, was postponed by law until January 2023. The reserve ratio, which is the trust fund balance divided by total wages, is now at -0.72%. (Colorado Department of Labor and Employment)

But for Colorado to be considered solvent by U.S. Department of Labor standards, it needs a reserve ratio of 1.0. At that reserve, the trust would be positioned to provide considerable benefits for laid-off workers in another recession or pandemic.

In other words, the trust fund would need “$2 billion, positive,” Gedney said. “So there’s a gap of about $3 billion.”

THE MATH: The solvency surcharge turns on when the trust fund’s reserve ratio — the trust fund’s balance divided by total wages — falls below 0.5% on June 30, the end of the state’s fiscal year. The surcharge adds to an employer’s insurance premiums. To turn off, the ratio needs to reach 0.7%. Based on state forecasts that Colorado’s workforce will earn $165 billion in total wages and have $1.16 billion in the trust fund by June  2025, the surcharge would turn off in 2026. 

All that said, anything could change those forecasts in 2022 — even at just a legislative level.

Rep. Rob Woodward, a long-time small business owner and Republican from Larimer County, said he is working on a proposal to use more of Colorado’s federal relief dollars to restore the trust fund completely. It would supplement Polis’ plan to put in at least $500 million.

“My proposal would be to take somewhere around $1.7 billion out of the one-time federal money and put it back in the bank and write a check to the feds to pay them back. It literally is just a budget item that restores the trust fund,” he said. “It shouldn’t have to rob any current programs but it certainly will prevent us from spending the money on …. something brand new.”

Almost 20 states, including Ohio and Maryland, are using federal relief to replenish their trust fund and pay off their loans, according to the National Conference of State Legislatures. Last month, Texas passed a budget that allocates $7.2 billion of its ARPA share to pay off its federal loan and steady its unemployment fund

Colorado’s legislature could also decide to postpone the solvency surcharge until 2024. Or they could bring back a bond, which Sen. Hansen hopes is considered.

After the Great Recession, a bond was used to pay off the federal unemployment loan and restock the trust fund. That eliminated the solvency surcharge and FUTA credit reductions, though it took employers until 2017 to pay the bond. 

“The feds right now are charging 2.2% and it kicks in the FUTA surcharges,” Hansen said. “One of the options would be to bond for some portion of that negative balance to get rid of that FUTA charge and the good news is the bonding right now we can do for about 1.5% to 1.8%. There are significant savings, at least 40 basis points lower than the federal loan rate. And as you can imagine, on that big of a balance, it adds up pretty quickly.”

The $1 billion federal loan in September started racking up $63,000 a day in interest, labor department Chief of Staff Daniel Chase said during a Joint Budget Committee hearing this month. The state made its first payment of $1.5 million on Sept. 30. The next one, which Chase estimated would be between $22 million to $25 million, is due next September.

Furman, with the Colorado Chamber, said employers are still recovering, they’re raising wages as they struggle to find workers, and now they face higher unemployment payments due to the federal loan and the rising wage base, which she suggested be stalled or reduced as businesses recover. The chamber would also support more federal relief to pay off the debt and replenish the fund.

“We’re all realists,” she said. “We’ve all been working in this environment for so long, we just want relief. We want relief for our employers, and there are (dozens of) other states that have done this already. They have used federal stimulus dollars as their general funds to backfill their deficits. This shouldn’t even come into question as to whether the state should help these employers.”

This story was corrected on December 20, 2021 to say that 76% of employers will see insurance rates below 2% in 2022.  

Tamara Chuang writes about Colorado business and the local economy for The Colorado Sun, which she cofounded in 2018 with a mission to make sure quality local journalism is a sustainable business. Her focus on the economy during the pandemic...