The Funding Crisis in State Unemployment Insurance

Upjohn Press Upjohn Research home page 1-1-1986 The Funding Crisis in State Unemployment Insurance Wayne Vroman Urban Institute Follow this and additional works at: https://research.upjohn.org/up_press Part of the Labor Economics Commons Citation Vroman, Wayne. 1986. The Funding Crisis in State Unemployment Insurance. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/9780880995597 This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License. This title is brought to you by the Upjohn Institute. For more information, please contact [email protected]. Wayne Vroman TheTL Fundingr j- in State Unemployment Insurance Wayne Vroman The Urban Institute 1986 W. E. Upjohn Institute for Employment Research Library of Congress Cataloging in Publication Data Vroman, Wayne. The funding crisis in state unemployment insurance. Bibliography: p. 1. Insurance, Unemployment United States. I. Title. HD7096.U5V76 1986 353.9©38256 86-1626 ISBN 0-88099-035-X ISBN 0-88099-034-1 Copyright 1986 by the W. E. UPJOHN INSTITUTE FOR EMPLOYMENT RESEARCH 300 South Westnedge Ave. Kalamazoo, Michigan 49007 THE INSTITUTE, a nonprofit research organization, was established on July 1, 1945. It is an activity of the W. E. Upjohn Unemployment Trustee Corporation, which was formed in 1932 to administer a fund set aside by the late Dr. W. E. Upjohn for the purpose of carrying on "research into the causes and effects of unemployment and measures for the alleviation of unemployment." 11 The Board of Trustees of the W. E. Upjohn Unemployment Trustee Corporation Preston S. Parish, Chairman Charles C. Gibbons, Vice Chairman James H. Duncan, Secretary-Treasurer E. Gifford Upjohn, M.D. Mrs. Genevieve U. Gilmore John T. Bernhard Paul H. Todd David W. Breneman Ray T. Parfet, Jr. The Staff of the Institute Robert G. Spiegelman Executive Director Saul J. Blaustein Phyllis R. Buskirk Judith K. Gentry H. Allan Hunt Timothy L. Hunt Louis S. Jacobson Robert A. Straits Stephen A. Woodbury Jack R. Woods 111 The Author Dr. Wayne Vroman is a senior research associate at The Urban In stitute. He has directed several research projects and published widely on such topics as money wage inflation, employment discrimination, payroll tax incidence, retirement behavior and permanent partial disability. In earlier research on unemployment insurance he developed a microsimulation model of benefit payments in the individual state pro grams. He has also examined a number of other unemployment in surance subjects such as the program©s macroeconomic effects, replace ment rates, legislative developments and program performance in the first half of the 1980s. IV Foreword Severe and lengthy recessions since 1970 have left many state unemployment insurance (UI) programs with problems of insolvency and debt. The federal-state system of unemployment insurance was in tended to be a self-financing social insurance program in which states levied payroll taxes on covered employers and paid benefits to eligible workers. Because benefit outlays have been exceeding tax revenues, however, there has been a widespread loss of trust fund reserves, large scale borrowing, and substantial debt accumulation. Although the volume of borrowing and aggregate indebtedness have started to decline in the mid-1980s, it is likely that indebtedness will persist in some states and that trust fund reserves will remain unacceptably low for most of the decade. In reviewing the history of funding problems in unemployment in surance since World War II, Dr. Vroman focuses on the period from 1970 to 1983, with emphasis on those states where funding problems have been most severe. He also analyzes recent debtor state adjustments, along with conditions associated with debt avoidance, and offers his findings as a basis for insights into why the problems have arisen and what policy issues should be considered. Facts and observations expressed in this study are the sole responsibili ty of the author. His viewpoints do not necessarily represent positions of the W. E. Upjohn Institute for Employment Research. Robert G. Spiegelman Executive Director February 1986 Preface In the mid-1980s, the federal-state system of unemployment insurance in the U.S. appears to be recovering from financial problems experienced during the 1970s and the back-to-back recessions of 1980 and 1981-82. During 1984 and 1985, the volume of borrowing by debtor states fell, loan repayments increased measurably and aggregate indebtedness declined. From an actuarial perspective, however, the conditon of the system is still very poor. Even if the current economic recovery proceeds at a brisk pace for the rest of the decade, it is not likely that trust fund reserves will be rebuilt to a level that satisfies accepted actuarial stan dards. Indebtedness is likely to persist in several major northern in dustrial states for most of the decade. The onset of a new recession could trigger a repetition of borrowing activities and debt accumulation that occurred during 1980-83. The present volume focuses on the recent history of financing prob lems in unemployment insurance. It reviews post-World War II ex periences, emphasizing the period from 1970 to 1983. Chapter 1 provides an overview of the funding problem. Chapter 2 is devoted mainly to analyses of the individual states where funding problems have been most serious. It also includes a cross-state analysis of recent debtor state ad justments. Chapter 3 focuses on some of the conditions associated with debt avoidance. To the extent that there are success stories in the system of unemployment insurance programs, they are contained in this chapter. The volume is intended to document recent funding problems in this established program of social insurance and to provide insights into why the problems have arisen. Although it does not offer a prescription for avoiding future funding problems, a concluding section does briefly discuss some relevant policy issues. VII Acknowledgments This work could not have been completed without the help of several other persons with a strong interest and detailed understanding of state unemployment insurance programs. Although I have not made all of the changes suggested by readers of a preliminary draft, their comments have been most helpful in the preparation of this document. I would like to thank them and add the usual caveats about remaining errors of fact and/or interpretation being my responsibility. As a careful and helpful reader of the entire manuscript, a special debt is due to Saul Blaustein of the Upjohn Institute. His comments have influenced all parts of this volume. For providing unpublished data appearing in several tables, I thank Jim Manning and those of his staff at the Unemployment In surance Service of the U.S. Labor Department: Cindy Ambler, Harold Rice and Shelia Woodard. Several people in individual states helped me in different ways that included providing data, describing recent state- level developments and reviewing draft descriptions of their state©s ex periences. A short list of those persons includes Carl Brewster, Jim Hem- merly, Daniel Light, Robert Malooly, Cliff Miller, Eugene Sampson, Bill Schwarz, Tom West, Alan Williamson and Earl Wright. Finally, the Up john Institute is thanked not only for the financial support that made this project possible but also for a continuing demonstration of interest in unemployment insurance. viii CONTENTS 1. The Funding Problem ................................. 1 Trust Fund Balances and Loans to State UI Programs ..... 5 Long Term Trust Fund Decline ...................... 5 Trust Fund Insolvency and Debt ..................... 12 Origins of the Funding Problem ....................... 21 Variations in Real GNP Growth Rates ................ 21 Disparities in Regional Rates of Economic Growth ..... 24 Inflation .......................................... 30 The Costs of Extended Benefits...................... 34 Benefit Payments Since 1970 .......................... 37 Summary .......................................... 41 Chapter 1 Notes ..................................... 41 2. Debtor State Experiences .............................. 45 Developments in 10 Debtor States ...................... 45 Pennsylvania ..................................... 48 Illinois........................................... 55 Michigan......................................... 61 Ohio ............................................ 68 Texas............................................ 72 Wisconsin........................................ 79 Louisiana ........................................ 85 New Jersey ....................................... 89 Minnesota........................................ 94 West Virginia ..................................... 98 Debtor State Comparisons ............................ 102 Factors Related to Debt Accumulation................ 103 Sizes of Deficits and Sizes of Adjustments ............. 106 Employer Tax Increases Versus Benefit Reductions ..... 110 Changes in Individual Program Provisions ............ 113 Summary .......................................... 118 Chapter 2 Notes ..................................... 119 3. Conditions of Debt Avoidance .......................... 125 Initial Trust Fund Balances and Effective Tax Rate Increases..................... 128 ix Active Policies and Debt Avoidance .................... 133 Tax Base Indexing ................................... 141 Economic Growth and Trust Fund Balances ............. 152 Summary .........................................

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