Title: UNEMPLOYMENT INSURANCE Serving North Dakota
1UNEMPLOYMENT INSURANCEServing North Dakota
- Interim Commerce Committee Hearing
- Minot, North Dakota
- November 13, 2003
2Objectives
- Discuss Federal Role in Unemployment Insurance
- Discuss funding of Unemployment Insurance (UI)
System - Review 1999 UI Legislation
- Discuss Results of 1999 Legislation
- Other Issues
3Unemployment Insurance System
- The Unemployment Insurance System was created as
part of the Social Security Act of 1935. Its
purpose was to to alleviate personal hardship for
workers unemployed through no fault of their own
and to stabilize the economy.
4Federal Role in Unemployment Insurance I
- Federal law (Social Security Act and the Federal
Unemployment Tax Act FUTA) require that state
UI laws conform to federal requirements, for
instance - - Experience rating as the basis for setting tax
rates. - - Failure to conform could result in all
employers in that state losing their 5.4 FUTA
tax credit.
5Federal Role in Unemployment Insurance II
- States must also comply with UI program
requirements. - Example States must
- -cooperate with federal agencies charged with
administration of unemployment compensation
laws. - - Ensure that wages subject to FUTA are also
subject to SUTA. - Could result in loss of FUTA credit, and loss of
administrative operations grant.
6Federal Role inUnemployment Insurance III
- Federal government suggests model for UI Trust
Fund solvency - Not a mandate on tax rates or solvency level
- If states UI Trust Fund goes negative, can
borrow from federal government - Must pay interest on amount borrowed.
- Cannot repay loan using UI tax revenues.
7Reiterating -Consequences ofFederal
Non-conformity or Non-Compliance
- States employers no longer receive FUTA tax
credit - FUTA tax rate goes to 6.2 for all employers in
the state - State could lose its UI administrative funding.
-
8How is theUI Trust Fund funded?
- ALL State UI taxes collected from North Dakotas
employers - go into the UI Trust Fund
9What can theTrust Fund be used for?
- The UI Trust Fund may only be used to pay
unemployment insurance benefits
10Who pays administrative costs to deliver the
program?
- Using the FUTA tax, the federal government funds
the administrative costs to deliver the UI
program in each state. - Some States have supplemented this funding with
State funds from several sources.
11Is this a good dealfor North Dakota?
- North Dakota employers pay more in FUTA taxes
than the state gets back in funding to administer
North Dakotas unemployment insurance and
employment service programs. - For instance, our 2002 estimate indicates that
North Dakota employers paid 13.9 million in
FUTA, and JSNDs UI/ES grant was 12.5 million.
12How are tax rates determined for businesses?
- UI Trust Fund financing is based upon Experience
Rating principles - Employers who do not control their costs pay more
- The greater an employers risk, the more the
employer must pay
13Unemployment InsuranceExperience Rating
- Experience Rating The mechanism in the tax
schedule that determines the rates assigned to
each covered employer based on the employers
experience
- Negative experience rating means the
accumulated benefits charged to an employers
account exceed the accumulated contributions.
- Positive experience rating means the
accumulated total contributions paid by an
employer exceed the accumulated benefits charged
to their account.
- New Employers with less than three years
experience are assigned a New Employer rate
based on whether they are construction or
non-construction employers.
141999 Legislation(HB 1135) Goals
- Stabilize average UI tax rate
- Shift part of the negative burden from
positive balance to negative balance
employers - Raise UI Trust Fund balance to solvency target
Over seven-year period
151999 Legislation Reasons
- UI tax rates were extremely volatile, especially
in the 1980s - For example,
- 1984 3.55 Change
- 1985 3.12 -0.43
- 1986 2.88 -0.24
- 1987 4.17 1.29
- 1988 2.79 -1.38
- 1989 2.31 -0.48
- 1990 1.64 -0.67
161999 Legislation Reasons
- Trust Fund balance diverged from the solvency
target in the late 1990s - Tax income to the fund from 1994 to 2002 was less
than benefit payouts
171999 Legislation
- Created arrays for tax rates
- Currently set at 10 for positive balance
employers - Currently set at 10 for negative balance
employers - Arrays created an incentive for employers to
manage their risk more effectively
181999 Legislation
- Imposed rate limiters that restricted an
employers tax rate increase to 30 per year for
the first three years (2000-2002) of the
legislation - Rate limiters expired in 2002, forcing a change
in many employers 2003 tax rates. - Job Service was proactive in notifying employers
of the change and explaining the reasons behind
it.
19Tax Rate Arrays
- Positive Balance employers
- Ten rates that range from 0.49 to 1.39 in
one-tenth intervals (2003 rates-same as 2000-2002
rates)
- Negative Balance employers
- Ten rates that range from 6.49 to 10.09 in
four-tenths intervals (2003 rates -same as
2000-2002 rates)
See jobsnd.com for details on how employers fit
into each array
20Would it be beneficial for each array to have 20
different rates instead of 10?
- More rates in each array would make rates
fluctuate more often as employers are
redistributed within each array - UI tax rates are a zero-sum game
- x number of employers must generate x amount of
tax revenue to hit the desired trust fund balance.
211999 Legislation Results
- Goal Stabilize UI tax rates
- Since 1990,
- 1990 1.64
- 1991 1.23
- 1992 1.48
- 1993 1.49
- 1994 1.22
- 1995 1.12
- 1996 0.86
- 1997 0.87
- 1998 1.10
- 1999 1.12
- 2000 1.26
- 2001 1.28
- 2002 1.31
- 2003-2006 Projection 1.57
221999 Legislation Results
- Goal Shift burden from positive balance
employers to negative balance employers - Negative employer deficit
- 1997 7.0 million
- 2002 4.5 million
231999 Legislation Results
- Goal Raise UI Trust Fund level to solvency
target
241999 Legislation Results
- Goal Raise UI Trust Fund level to solvency
target - Trust Fund level rising with new rate structure
- Progress through 2002 impeded by rate limiters
25Trust Fund Solvency
- The UI Trust Fund requires a reserve for the same
reason every other insurance program requires a
reserve -to protect the Fund against a
catastrophic event (such as a large number of
business closings or major employer layoffs)
26Trust Fund SolvencyCould the reserve dissolve?
- If benefit payments rose in 2003-05 at the same
rate they rose in 1975-77, the UI Trust Fund
would be bankrupt by 2005, without substantial
rate hikes - 1975-77 was not even the worst economic downturn
North Dakota experienced in the last 30 years
27Graphic Illustration
28Trust Fund Solvency
- It is crucial for the Trust Fund to reach the
solvency target - The solvency target is set to protect against the
highest benefit payout periods in recent history - The overall purpose of the UI program is to
soften the impact of an economic downturn
29How is the Trust Fundsolvency target set?
- Federal government suggests model called the
Average High Cost Multiple (AHCM) - Equals one year of benefit payments, without
additional revenue, at a rate equal to the
average of the 3 worst benefit years in the last
20 years - North Dakota altered the model (MAHCM), using the
highest benefit payout year in the last 20 and
the two highest benefit payout years in the most
recent 10-year period - Altered model results in a lower target
30Trust Fund Reserve Target
Dramatic decline in 2006 2007
- Solvency Target
- Year Millions
- 2000 76.2
- 2001 76.2
- 2002 75.6
- 2003 71.4
- 2004 73.0
- 2005 74.7
- 2006 63.0
- 2007 56.7
- 2008 56.0
- 2009 56.6
- 2010 57.9
- 2011 59.2
- 2012 57.6
- Planned year to reach solvency target.
31Average Weekly Benefit Amount/Duration 2002
- Average weekly benefit amount 219.27
- Average claimant duration 11 Weeks
- Average benefit payout 2,412
32Other Issues
- Would North Dakota be better off without federal
requirements? - Employers would lose FUTA tax credit
- Less stringent guidelines would destabilize
economy during a downturn - - Could effect interstate agreements providing
capacity for multi-state and interstate claims
33Other Issues
- Why isnt the UI program more like Workers
Compensation? - No one wants to file a workers compensation
claim not the employer, the worker, or the
state - There are valid economic reasons why employers
may want their workers to file UI claims - Inventory
- Temporary lack of demand
- Seasonality
- Others
- (((These reasons make a pay-as-
- you-go system undesirable)))
34Summary
- Effects of 1999 legislation
- UI average rates stabilized
- Burden has shifted from positive balance to
negative balance employers - Reserve is slowly rising to meet solvency target
- Progress should be quicker now that rate limiters
have expired. - Reserve scheduled to be at solvency
- target by 2007
35Summary
- Job Service North Dakota
- Will continue to work with employers to explain
their UI tax rates and the effects of the 1999
legislation - Will continue to monitor the effects of the
legislation and report back to the Legislature
and businesses - Will continue to assign fair and accurate UI tax
rates - Will continue to provide excellent customer
service to the business community
36Questions?