How Will the Cost of Ohio’s Unemployment Compensation System Affect Your Business?
HRACO Magazine May 1, 2011
The dramatic increase in Unemployment claims in Ohio over the last few years required the state to borrow funds from the federal government to ensure unemployed workers continued to receive benefits. Ohio now faces a significant UI debt and all roads point to job creation, a stronger economy and better business environment to climb out of the recession and prepare for any future economic storms.
Snapshot of unemployment compensation system in Ohio It is hard to imagine that the state was at near full employment in 2000 when the UI rate was under 4 percent.
The rate hit its recent highest point at 10.6 percent in 2009 and is beginning a downward trend at 8.9 percent as of March 2011. Unemployment had been hovering between 4 and 5 percent since the mid-1990s, but hasn’t seen this high of unemployed workers since the early 1980s – the last time our trust fund went broke. (See Chart A) An unemployment rate of 8.9 percent means there are over 5.2 million Ohioans working and around 526,000 unemployed. But, this rate varies widely among Ohio counties with the highest UI rate in Ottawa of 18 percent and the lowest in Delaware County at 6.7 percent.
Employers pay into both the state and federal unemployment compensation trust funds. Solvency of the state’s UC trust fund had been a growing concern for a number of years, but finally moved into the red in January of 2009. Ohio currently owes the federal government over $2.6 Billion for loans from the Federal Unemployment Compensation Account (FUA) – commonly referred to as Title XII loans. But, the goal is not simply to get back to zero. The goal is to replenish the fund to what is called “minimum safe level” in order for it to weather future economic downturns. The minimum safe level is around $2.5 Billion, therefore the state UI fund is approximately $5 Billion away from where it needs to be in the future. (See Chart B) The Office of Unemployment Compensation (OUC) within the Ohio Department of Job and Family Services (ODJFS) administers the UC program in Ohio. The program collects taxes (contributions) from over 218,000 Ohio employers (down from over 230,000 a few years ago) and processes about $1.2 billion in revenue per year.
The state fund pays for administering the program and distributing UC benefits for qualified claimants. Employers pay unemployment taxes on the first $9,000 of an employee’s wages per year. Depending on the industry and a company’s layoff history (experience), an employer’s rate can be as low as 0.7 percent (about $63/employee) or as high as 9.6 percent (about $864/employee). If a company’s payment is delinquent, then the rate can be as high as 12 percent.
Employers also pay 0.8 percent on the first $7,000 of wages per employee (about $56/employee) to the federal unemployment fund. This federal tax is collected by the IRS and deposited in the federal treasury into three accounts: 1) the Employment Security Administration Account (ESAA) – used to pay administrative costs; 2) the Extended Unemployment Compensation Account (EUCA) – used to pay for extended benefits; and 3) the Federal Unemployment Account (FUA) – used to loan funds to states that have trust fund deficits. If Ohio does not maintain certain conformity requirements with federal law employer’s rates could soar from 0.8 percent to 6.2 percent or from $56 to $434 per employee!
Employers have seen modest increases in their state unemployment taxes over the last few years as automatic triggers kicked in to try to keep the fund solvent. However, the increases just haven’t been enough to stay ahead of the benefits paid out. Since Ohio is utilizing more and more federal resources to weather the current economic situation, the federal government will look to Ohio employers to replenish their fund through higher contributions or taxes.
The best comparison of State UI tax burden is the average tax on total wages. Ohio’s tax on total wages as of December 2010 was 0.75%, just below the national average of 0.76% and lower than most surrounding and Midwestern states. (IN – 0.63%; IL – 0.83%; KY – 0.85%; MI – 1.15%, MN – 0.85%, PA – 1.09%, TN – 0.80%, WV – 1.03%, WI – 1.07%)
What is happening across the country?
The highest unemployment in nearly three decades is spread across the U.S. and very few counties and states have been immune. (See Chart C) State unemployment taxes increased as a percent of total wages on average by 34% from 2009 to 2010 and are expected to increase even more for 2011 and 2012. Thirty-two (32) states have outstanding federal loans of over $48 Billion. (See Chart D) The United States Department of Labor (USDOL) projects peak in 2013 of up to 40 states and $65.2 billion. Interest on loans is charged at the rate of just over 4% for 2011. Approximately $1.7 billion will need to be paid from sources other than the state UI tax – employers in 19 states will pay a special assessment to cover this cost (AL, AR, AZ, CO, CT, DE, FL, HI, IN, KS, MI, MN, MO, NJ, NY, PA, RI, SC, WI). The first interest payment from states is due September 30, 2011 and interest will continue to accrue as long as loans are outstanding.
Federal Unemployment Tax Increases in borrowing states have begun in MI, IN and SC and are projected in 24 states for 2011 costing more than $2 billion in additional FUTA taxes. There is an automatic FUTA per employee tax increase each year ($21, $42, $63, etc.). The current FUTA tax rate of 0.8% (6.2%, with 5.4% offset) on $7,000 tax base IS scheduled to sunset by June 30, 2011 but likely to be extended. Cash flow or high unemployment rate waivers are available under current federal law, but few, if any states are likely to qualify. The primary FUTA funded accounts are $30 to $40 billion in deficit, relying on transfers from federal general revenue to maintain cash for unemployment compensation. Spending on unemployment compensation is at an all-time high, jumping from approximately $31 billion in 2008 to $120 billion in 2009, $160 billion in 2010 and projected $120 billion for 2011.
State and federal unemployment taxes will continue to increase over the next three years and remain at higher rates for at least ten years on average. Average UI taxes will more than double with some employers experiencing much higher tax increases as a percentage of total wages. Increased taxes will increase the cost of hiring. Increased duration of unemployment compensation will continue to be a disincentive to individuals deciding whether to actively seek and accept work available in the labor market. Relief from automatic Title XII interest and FUTA offset credit penalties is possible only if states, businesses and workers push for them. States with no debt may be less supportive of relief, arguing that they have already addressed solvency and did not get relief.
Federal UI Proposals
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed in December 2010 as HR 4853, extended federal Emergency Unemployment Compensation (EUC) and 100% federal reimbursement for such costs for claims through January 4, 2012. But, simply extending UI benefits does not get people back to work. President Barack Obama’s “UI Integrity” proposal increases recovery tools, but also provides for work sharing federal requirements and a new employer reporting penalties. In addition, President Obama’s proposed FY 2012 budget, introduced on February 14, 2011, would provide relief from interest and FUTA penalties for 2011 and 2012 – both good ideas. But, his proposal also includes extending the 0.2% FUTA surtax (through 2013) and in 2014, reduces the FUTA tax rate, but increases the FUTA tax base to $15,000 from $7,000 and indexes the tax base to annual wages - a net increase in unemployment tax of $58.5 billion. A recent Government Accountability Office (GAO) study suggests an increase in the taxable wage base is needed. Click here for descriptions of the President’s proposal. Click here for economic data updated by USDOL with the President’s budget.
In Congress, U.S. House Representative Jim McDermott (D-WA) has been interested in further UI benefit expansions, FUTA tax base increases and indexing that would impact low state UI tax base states the most, including Ohio. In the U.S. Senate, Senator Richard Durbin (D-IL) proposed short term relief and long term tax increases by introducing S 386 on February 17, 2011. But, Sen. Durbin’s proposal added FUTA tax relief for employers in states with solvent state trust funds, abatement of loan principal for borrowing states if they meet solvency and make no reductions in weekly benefit amount, maximum benefit amount, or disqualifications. Click here for a copy of S 386.
House Republicans have been developing a UI proposal based on testimony heard at a House Ways and Means Subcommittee on Human Resources hearing on February 10, 2011. Click here to read the hearing testimony. The legislative proposal is likely to consider benefit spending cuts, short term tax relief, and improvements in work search and integrity provisions to reduce the duration of unemployment claims. Senate Democrats are still reviewing both President Obama and Sen. Durbin’s proposals, but likely to enact something before June 30, 2011 and/or September 30, 2011
All UI legislative reform proposals will likely be considered in each House with a chance of enactment before June 30th, when the FUTA 0.2 surtax otherwise sunsets. An extension of this surtax is likely for the balance of 2011 and possibly for a longer period of time, at least until there is agreement on the larger package of reforms. The federal debate on the larger UI reform package is likely to be finalized before September 30th because it is the last day of FY 2011 and the day that Title XII interest payments for the first 9 months of 2011 will be due.
What will the impact be on Ohio employers?
Obviously much more research and investigation must take place to fully understand the ramifications of all the current proposals at the federal and state level. But, the mix of state and federal UI tax increases will depend on legislation and policy in the next two years. A short term/ long term plan is to first assure economic recovery and then plan for long term debt management is needed with consideration of measures to reduce benefit payout and increase taxes until solvency is achieved. The most effective solution to solvency is job creation because it reduces benefit payout and increases tax revenue. Keeping employer tax burden low reduces costs and promotes job creation.
Governor John Kasich (R-OH), with assistance from the House and Senate, has launched a few initiatives to focus on job retention and job matching in Ohio. The JobsOhio initiative, enacted as HB 1 by the Ohio legislature, is the creation of a non-profit organization to perform state economic development functions in partnership with the Department of Development to help attract and retain companies in the state. HB 58 was signed by Ohio Governor John Kasich on March 7, 2011. The bill amended the conditions for employers to take advantage of the Job Retention Tax Credit and extended UI benefits for eligible claimants through the end of the year. In addition to encouraging closer partnerships with colleges and universities and business community employment needs the Governor has reinvigorated the state employment clearinghouse website, www.OhioMeansJobs.com, a partnership between Ohio and Monster.com.
To date there has been no legislation introduced that would directly address Ohio’s UI Trust Fund solvency. There are several issues that could be addressed that would not impact state UI taxes on employers. Such ideas include no further benefit increases or expansions while the trust fund is insolvent, lowering the new employer tax rate to encourage job growth, requiring more aggressive work search requirements for claimants and allowing smaller employers to report wages annually instead of quarterly. Unfortunately, employer tax increases, whether through rates or taxable wage base, at the federal or state level may be inevitable to reduce the overall debt and more quickly return the state UI trust fund to solvency.
But, if Congress and President Obama raise the taxable wage base to $15,000 Ohio employers will be paying a significant amount more per employee in the future. Specifically, an employer paying the lowest tax rate of 0.7 percent could expect to pay $105 instead of $63 per employee. An employer paying the highest rate can expect to pay $1,440 instead of $864 per employee.
What can HR Professionals in Ohio do to get involved?
Organizations, such as UWC, SHRM and business advocacy groups, need the help of human resource professionals to explain the impact of increasing payroll taxes on decisions to hire. Remember you are the expert. HR professionals can best explain the practical impact of individuals staying on unemployment compensation for long periods, such as loss of job skills and disincentive to accept jobs that are open while claiming unemployment compensation. Another strategy is working with staff and third-party administrators to aggressively manage UI claims costs through paying attention to benefit charges, refusals of work, overpayments and fraud. In addition, HR professionals are encouraged to work with state workforce agencies to identify opportunities for unemployed workers for on the job training, internships, and customized training that may serve some of your needs while reducing unemployment claims.
The business community and state leaders have specifically advocated for: (1) two years of relief from Title XII interest penalties; (2) two years of relief from FUTA offset credit penalties on employers in states with outstanding Title XII loans; (3) enhanced integrity measures and (4) stronger job search efforts by claimants. In addition, support for any policy initiatives that: (1) reduce the cost of hiring and employment, (2) encourage unemployed workers to seek and accept work, and (3) implement initiatives and provide services that are most effective in assisting unemployed workers return to work, will help reduce the UC burden on employers and achieve trust fund solvency. The best way to reemploy job seekers is to continuously find ways to keep employers in Ohio or to help companies expand their operations.