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Unemployment Insurance Financing Situation - 2008

Dr. Wayne Vroman

The Urban Institute

wvroman@urban.orgEARN Conference Presentation

December 9, 2008

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0.0

2.0

4.0

6.0

8.0

10.0

12.0

Mill

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Unemployment Regular UI Regular UI + EUC

Chart 1.Unemployment and UI Claimants, 2001 to 2008

Lowest months in 2007 - Aug.-Oct. 3

1 3 5 7 9 11 13 15

Months after lowest three-month average

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Rat

io t

o Lo

w A

vera

ge

2008 2001 1991 1980

Chart 2. Monthly Continued Claims: Ratio to Low AverageFour Downturns - Regular UI Program

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Pre-recession Reserves: 51 States

Net Reserves,

Dec. 31

($Bill.)

(1)

Total

Payroll

($Bill.)

(2)

Reserve Ratio =100*(1)/(2)

1989 36.87 1,918 1.92

2000 54.05 3,702 1.46

2007 37.62 4,760 0.79

2007/2000 .732 1.268 .541

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Chart 3. Aggregate UI Reserve Ratio, 1960 to 2007

-1.0

0.0

1.0

2.0

3.0

4.0

Reserve Ratio - Net Reserves as Percent of Payroll, December31

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The Reserve Ratio Multiple - RRM

• RRM - Measure of UI trust fund adequacy• Considers three factors

– (1). Net end-of-year reserves – (2). Scale of state economy (total payroll as proxy)– (3). Potential benefit payouts (highest past 12 month payout rate as

proxy)

• Formula RRM = [(1)/(2)]%/(3)%• Numerator – [(1)/(2)]% - Reserve ratio as a %• Denominator – (3)% - High cost rate as a %• Suggested Solvency Standard - RRM = 1.0• U.S. RRM December 31, 2007 = 0.35• U.S. RRM October 31, 2008 = 0.32

50 states plus D.C. 7

16

1116

2126

3136

4146

51

-0.50

0.00

0.50

1.00

1.50

2.00

Res

erve

Rat

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ultip

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RRM - Oct. 31, 2008

Chart 4. Reserve Ratio Multiples, October 200851 Programs Ranked by Size

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Summary: Large and Small States-2007

Net Reserves

($Bill)

(1)

Payroll

($Bill)

(2)

Reserve Ratio

[(1)/(2)]%

(3)

High Cost

Rate %

(4)

RRM

(3)/(4)

(5)

All States

37.6 4,760 0.79 2.24 0.353

10 Large States

12.6 2,690 0.47 2.48 0.190

10 Small States

2.25 118 1.91 2.99 0.639

Large/

Small

5.2 22.8 0.25 0.83 0.297

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Presence of Indexation in 2008

Indexed Tax Base

Big States All Other States

51 “States”

Max WBA

Indexed

16 5 (CT, IL,

MA, OH, PA)

9 30

Max WBA Not Indexed

1 (AK) 12 8 21

Number of States and Share of

Employment

17

18%

17

67%

17

15%

51

100%

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Tax Base Indexation

• Present in 16 states (out of 51)• Present in just 4 large states (Minnesota, New Jersey,

North Carolina, Washington)• Indexation percentages range from 100 percent of

average statewide wages (Hawaii, Idaho) to 47.5 percent (Oklahoma)

• Indexation associated with high tax bases (simple averages - $24,275 indexed versus $8,971 non-indexed) and high taxable wage proportions

• Indexation associated with high trust fund reserves

UI Financial Data ET Handbook 394 11

UI Tax Bases in 2007

Tax Base Indexed Not Indexed

Above 25,000 6 0

16,000 – 25,000 9 0

10,000 – 15,000 1 9

8,500- 9,500 0 9

8,000 0 8

7,000 0 9

16 35

17 state simple averages 12

Chart 5. Taxable Wage Proportions, 1966 to 2007.

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

17 Indexed States 17 Big States, Not Indexed U.S. Average

17 state simple averages 13

Chart 6. Reserve Ratios: 17 Indexed States and 17 Large States, 1960 to 2007

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

17 Large States 17 Indexed States

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Indexation and Risk of Borrowing, 1991 and 2001 Recessions

Indexed Tax Base

Big States: Tax Base not

indexed

All Other States

51 “States”

Max WBA

Indexed

N =16

2/32 = 0.062

N =5

4/10=0.400

N = 9

1/18 = 0.056

N = 30

7/60 = 0.117

Max WBA Not Indexed

N =1

0/2 = 0.000

N =12

8/24 = 0.333

N = 8

1/16 = 0.062

N = 21

9/42 = 0.214

No. of States and Risk

Share of Emp.

N = 17

2/34 = 0.058

18%

N = 17

12/34 = 0.353

67%

N = 17

2/34 = 0.058

15%

N = 51

16/102=0.157

100%

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Indexation and Reserve Ratio Multiples – October 2008

RRM – Oct. 31, 2008

Indexed Programs

Non-indexed Programs

51 Programs

Below 0.50 4 27 31

0.50 to 0.99 6 6 12

1.00 and Above

6 2 8

Total 16 35 51

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Indexation of the Maximum Weekly Benefit

• Present in 30 states in 2008• Maximum as a percent of the average weekly wage

ranges from 26 percent to 67 percent in 2007– One state below 30 percent (District of Columbia)

– 14 states from 30.0 to 39.9 percent – 2 indexed

– 16 states from 40.0 to 49.9 percent – 10 indexed

– 12 states from 50.0 to 59.9 percent – 10 indexed

– 8 states from 60 to 66.6 percent – 8 indexed

– Indexation associated with above-average maximum benefits and with above-average benefit replacement rates

17 state simple averages 17

Chart 7. Ratio of Maximum Benefit to Weekly Wage for Three Groups of States, 1966 to 2007

0.35

0.40

0.45

0.50

0.55

0.60

0.65

17 Large States 17 Indexed States Other 17 States

17 state simple averages 18

Chart 8. Replacement Rates for Three Groups of States, 1960 to 2007

0.30

0.33

0.36

0.39

0.42

0.45

17 Large States 17 Indexed States Other 17 States

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Summary

• To date the downturn in the labor market is of unknown severity

• Recession will be more severe than in 1991 or 2001• Aggregate reserve situation of the states is not strong

– A serious recession will cause several states to need loans– Large states have generally low reserve ratios and RRMs– Indexed states have generally high taxable wage

proportions and high reserves• Indexed states generally have higher weekly benefit

maxima and higher benefit replacement rates than other states

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Suggestions to Improve UI Financing - 1

• UI Taxes– Raise and index the federal UI tax base

1. Increase it enough to make half of total payroll taxable, say $20,000

2. Index the federal taxable wage base

3. This will cause many states to raise their state UI tax bases to remain in conformity with federal experience rating requirements

– Increase the oversight of experience rating 1. Oversee state reporting to ensure that all states have at least some

employers at 5.4 percent tax rate or higher

2. Study the growth in employers taxed at the minimum rate

3. Prohibit tax holidays as enacted in Georgia, Kansas and North Carolina in the 1990s

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Suggestions to Improve UI Financing - 2

• Encourage states to build their trust funds1. Pay all states an added 1% on balances between RRM = 0.25 and RRM

= 0.502. Reward states with “large” balances with a bonus interest rate (added

1%) for loans made to other states with low or negative reserves3. Prohibit interest arbitrage when trust fund interest rates exceed the yield

in the private bond market and a state deposits the proceeds of a private loan into its UI trust fund

4. Prohibit “gaming” of cash flow loans through repeated repayments of Treasury loans on Sept. 30th of successive years

5. Do not allow cash flow loans to states with “inadequate” pre-recession trust fund balances