BROKEN TRUST
Fixing the Unemployment Trust Fund in Massachusetts

[i] Massachusetts Division of Employment and Training. Quarterly Trust Fund Report. Boston: DET, Jan. 2003; Senate Post Audit & Oversight Committee projections based on previous Trust Fund trends.

[ii] Boushey, Heather & Jeffrey Wenger. “Coming Up Short: Current Unemployment Insurance Benefits Fail to Meet Basic Family Needs.” See http://www.epinet.org/Issuebriefs/ib169.html, visited 31 Mar. 2003.

[iii] Chimerine, Lawrence et al., United States Department of Labor. “Unemployment Insurance as an Economic Stabilizer: Evidence of Effectiveness Over Three Decades.” Unemployment Insurance Occasional Paper 99-8. Washington, D.C.: DOL, 1999.

[iv] Economic Policy Institute. “Analysis of Current Population Survey.” Washington, D.C.: EPI,  Feb. 2003.

[v] Massachusetts Taxpayers Foundation, Associated Industries of Massachusetts, Greater Boston Chamber of Commerce. Fragile Progress: Reigning in Massachusetts’ High Health Care Costs. Boston: Massachusetts Taxpayers Foundation, Feb. 2003.

· History of Unemployment Insurance ·

The Unemployment Insurance (UI) program was introduced by President Franklin Delano Roosevelt as part of the Social Security Act of 1935. This program was established in response to the Great Depression and was designed to provide temporary financial assistance to workers who lost their jobs through no fault of their own, such as through plant closings or layoffs. As part of a comprehensive legislative package that provided assistance to the retired elderly and impoverished children, UI became a safety net for almost all employees in the country. Additionally, UI was designed to be an economic stabilizer to maintain consumer spending during times of high unemployment.

This program provided critical relief to the more than 12 million people out of work in the early 1930s[1], which was one quarter of the nation’s workforce.[2] During the time UI was created, the workforce was based primarily on a predominantly male, one bread-winner per household system. Over the years, however, the workforce evolved to include more women, people with part-time jobs, and workers with multiple jobs.[3] "Since the 1950s, part-time work has nearly tripled in the United States, now representing about 17 percent of the workforce." [4]

This program was established as a shared responsibility between federal and state governments, in which each state established a UI benefit and finance system mechanism in compliance with federal regulation. In 1937, the federal government instituted the Federal Unemployment Tax Act (FUTA), a payroll tax to fund each state’s UI administrative costs.  The Secretary of Labor approved each state’s UI program to ensure it met FUTA guidelines. The UI system was officially placed under the jurisdiction of the Department of Labor (DOL) in 1949.[5]

Employers are required to pay the federal FUTA tax for each employee. In exchange for having a state UI system employers receive a 5.4% credit on their FUTA tax payments. As a result, net federal taxes amount to 0.8%, or a maximum of $56 per employee annually.[6]  FUTA funds are directed back to the states to pay for the administration of the UI system.  When the UI program was first established employers were required to pay taxes that nearly matched the level of benefit payments. Since then, employers’ UI contributions have steadily declined.[7]

In addition to individual state trust funds, there are three federal trust funds established to pay for the UI program. The Employment Service State Administration (ESSA) trust fund finances UI administrative costs along with other related programs. The Extended Unemployment Compensation Account (EUCA) trust fund is established to pay for the federal portion of UI Extended Benefits. The Federal Unemployment Account (FUA) provides loans to states when high unemployment rates deplete their trust funds.[8] 

While there have been programmatic changes to UI over the years, the federal-state relationship has remained unaltered. In 1954, the Reed Act was passed, requiring DOL to distribute FUTA surpluses to the states to maintain the health or "solvency" of the fund. During the 1960s, DOL instituted programs to further assist the workforce, including the Manpower Development and Training Act of 1962 and the Employment and Training Administration Act of 1963.[9]  The Federal-State Extended Unemployment Act of 1970 created the Extended Benefit program. This program provides extended benefits to workers who have exhausted their benefits during periods of high unemployment. This provision enables individuals to collect up to 13 additional weeks of benefits.[10] In 1987, under the Reagan administration, Congress instituted a federal income taxation of unemployment benefits.[11]

Recently, there has been an effort in the federal government to change the structure of the program. Referred to as "UI devolution," the funding of UI administrative costs would shift from the federal government to the states. The devolution proposal would phase out the FUTA tax completely, make consolidated Reed Act payments to the states, and ultimately require the states to finance UI administration without federal assistance.[12] In addition, President Bush’s economic plan recommends establishing Personal Reemployment Accounts for unemployed workers who are "likely to exhaust their benefits".[13]  Such individuals would be eligible to receive up to $3,000 for job search expenses, such as job training, transportation, and relocation. They would not, however, be eligible for most of the additional training and employment services provided under the current UI system.[14]

The Unemployment Insurance program was a cornerstone of FDR’s New Deal legislation designed to provide protection against the instability of economic downturns such as the Great Depression. Economists support UI because it maintains consumer spending during recessions and focuses funds on areas hardest hit by joblessness.[15] It has proven an extremely effective insurance program for United States workers over the past 80 years, providing assistance to more than 400 million unemployed people.[16]  During this current recession, federal and state governments bear great responsibility to ensure the Unemployment Insurance safety net is available for current and future generations.

· Massachusetts: UI Overview ·

In Massachusetts, the Division of Employment and Training (DET) administers the Unemployment Insurance (UI) system. While the Legislature determines UI benefit levels and eligibility, DET is responsible for all program operations, including UI Trust Fund management. Almost every employer is required to participate in the UI system and all eligible employees can receive benefits.[17] Overall, DET serves more than 150,000 employers and 390,000 unemployed in the Commonwealth each year.[18]

The primary goal of UI is to provide a basic level of assistance to unemployed workers during a temporary job search. Beneficiaries receive approximately half of their previous wages for a time-limited period and for most it is their only source of income during unemployment. As Massachusetts has the third highest cost of living in the nation, even people who receive the maximum amount of benefits find themselves struggling to stay afloat. This burden is even worse for low-income families who live from paycheck to paycheck. Recipients are often forced to deplete savings, retirement funds, and assume additional debt to afford basic living needs, such as food, clothing or housing. The table below indicates recipients in Massachusetts face a substantial shortfall compared to other major cities.[19]

· UI Benefits·

ELIGIBILITY

To be eligible for UI in Massachusetts, a claimant must meet two main criteria: monetary eligibility and a qualifying reason for job separation. In the vast majority of situations, workers must also be "able and available" to search for full-time employment.  

·        Monetary Eligibility: In order to meet monetary guidelines, claimants must earn 30 times their weekly benefit rate (typically 15 weeks) and have total earnings of at least $3,000 during the base period. Massachusetts has two base periods. Most people fall under the primary base period, which calculates eligibility using wages paid in the last four completed quarters prior to filing a UI claim. If an individual is not eligible under the primary base period, DET automatically recalculates the information using the alternate base period. This uses the most recent earnings in an incomplete quarter, plus the three most recent completed quarters. In limited situations, recipients may use the alternate base period if their most recent earnings would increase benefits by 10%. In 2002, approximately 8,000 recipients were eligible through the alternate base period.[20]

·         Job Separation: DET reviews each claimant’s job history to ensure involuntarily separation from work. Claimants are considered ineligible for UI if they leave work for a disqualifying reason, such as voluntarily leaving a job, or termination resulting from deliberate misconduct or willful disregard of employers’ interests.[21]  Claimants may provide "urgent, compelling and necessitous" reasons to voluntarily quit a job, such as unexpected changes in childcare arrangements.[22] In 2001, lawmakers in Massachusetts passed legislation to allow victims of domestic violence to voluntarily leave a job to protect their safety.[23]

Once eligible, recipients must demonstrate they are "able and available" for work that matches their skills, training and experience. Each week, beneficiaries forward information to DET, either by mail or telephone, to indicate an active search for employment.

Massachusetts law generally restricts eligibility to workers seeking full-time employment. There is a provision, however, that allows certain recipients to work part-time and receive UI benefits. For example, a claimant who previously held a part-time job or who has a new or worsening disability may be eligible to receive UI benefits while seeking a part-time job.[24] Certain workers can receive unemployment benefits if they are working part-time jobs. An earnings disregard of one-third of the unemployment check is applied to wages, after which benefits are reduced on a dollar-for-dollar amount.

Claimants who hold multiple jobs and lose both may find their unemployment checks are reduced through a constructive deduction. This occurs when an individual quits or is terminated from a part-time job within two months of an involuntary layoff-deductions are then taken as if the individual was still working the part-time job. 

The size of the part-time workforce in Massachusetts is above the national average, with more than 590,000 residents in such jobs.[25] In conjunction with those forced to work multiple jobs, this trend is indicative of the changing composition of the workforce. Today, high living costs often require two incomes in the household, either through a spouse working part-time or the primary provider taking a second job. UI generally does not permit benefits for workers who must look for part-time work due to family care taking needs. 

SUCCESS STORY IN LAWRENCE[26]

Juliana, married with two children, was laid off from a major telecommunications company after   14 years. As both parents in this family needed to work, Juliana looked to medical field for her new career. After job training, she became a medical assistant at a community health center in Lawrence. "I would probably still be unemployed if I didn’t have these benefits. Now I would like to return to school and eventually become a radiology technician."

BENEFITS

Eligible UI recipients receive 50% of their previous salaries during their job searches. Benefits may not exceed 57.5% of the state’s average weekly wage, which is determined by DET each October. Currently, the maximum weekly benefit is $507, but almost half of the state’s beneficiaries receive less than $250/week.[27] UI benefits are considered income and are therefore subject to state and federal income taxes.

To help offset the cost of providing for a family, eligible beneficiaries may receive an additional $25 each week per dependent. This dependency allowance is capped at 50% of the recipient’s weekly average benefits. For example, a recipient with three children who receives $100/week would receive an additional $50, not $75, through this provision. Only the "primary care giver" is eligible to receive the dependency allowance, even if both parents live in the same house and are unemployed at different times.

MAKING ENDS MEET[28]

Paula, married with one child, was recently laid off from a medical company in Lowell. Paula receives unemployment insurance benefits and an additional $25/week for her daughter. She discussed how even with benefits, it is difficult to make ends meet. "I can only buy the necessities. I stopped going to big stores and I try to save as much money as I can. There is only a little extra money for my daughter, but it helps to pay for her needs."

A recipient’s benefit length is determined by calculating certain earnings to establish a weekly benefit amount, which is then applied over 30 weeks. Massachusetts is one of two states in the country that offers 30 weeks of benefits; all other states offer 26 weeks. The average benefit duration in Massachusetts is approximately 18 weeks, which means that many recipients do not qualify for the full duration or find new employment before benefits exhaust. Also, during periods of high unemployment states may apply for federal benefit extensions, which are generally 13 weeks. These federal extensions pay UI benefits for all qualifying recipients after the 26^th week. While Massachusetts’ law provides recipients with 30 weeks of benefits, it reverts to 26 weeks during a federal extension.[29] As there have been three federal extensions since March of 2002, Massachusetts has not had to pay for the additional four weeks of benefits in more than one year.

All recipients have a one-week "waiting period", during which they do not receive benefits. This requirement was waived following the September 11^th tragedy, but was recently reinstated.

TRAINING

Through the Training Opportunity Program, commonly referred to as Section 30 programs, eligible recipients can extend their benefits up to an additional 18 weeks and waive the work search requirements to participate in approved training programs. Additional weeks of benefits are not experience based as they are provided through the solvency account. Training programs are financed through other sources, such as federal grants, and not the Trust Fund. The Section 30 program includes vocational training, computer classes, and both English as a Second Language (ESL) and General Equivalency Diploma (GED) preparation. To qualify for this extension, recipients must apply within the first 15 weeks of eligibility and select a training program that can be completed within one year. Certain technical courses are two-year programs and are excluded from Section 30 guidelines. In 2002, approximately 7,000 of almost 400,000 UI recipients applied for and received Section 30 training.[30] This relatively low enrollment rate indicates the need for better-coordinated outreach and eligibility reform.

DET implemented the Worker Profiling System (WPS), a computerized system that tracks unemployed recipients who are most likely to exhaust their benefits. Through this system, DET may withhold benefits if such a recipient is not compliant with required reemployment programs. One-Stop Career Centers located throughout the state administer the WPS, as well as additional career training services, such as career counseling and job search workshops. These Centers are federally funded through the Workforce Investment Act (WIA) and the Wagner-Peyser Act. In the event of a large layoff, the Commonwealth Corporation’s Rapid Response Team works in conjunction with these Centers to immediately provide workers with information about benefits and job search options. This independent team, comprised of labor representatives and state workforce officials, is critical in applying for emergency federal job training grants. While the UI Trust Fund does not pay for job training, it is essential in returning unemployed to the workforce and reducing the strain on the Trust Fund, by assisting workers to secure more stable, higher wage jobs.

BENEFITS OF JOB TRAINING[31]

Jimmy worked at a distribution center in Norton for 29 years when he was laid off along with 400 other employees. Jimmy began to use the Brockton career center and quickly learned about training opportunities available through UI. Soon, Jimmy was hired as a career counselor and has helped 380 of the 400 laid off workers find new employment or other options. "I know some of these people better than my family. I won’t be happy until I reach every last one of them."

HEALTH INSURANCE

UI recipients in Massachusetts have access to the Medical Security Plan (MSP), administered by Blue Cross/Blue Shield. It is the only health insurance assistance plan in the country for unemployed workers. The MSP is funded by employers through a $16.80 per employee annual assessment, a rate that has remained unchanged since 1988. Employers with five or less employees pay no contribution, however their employees are still covered.

The MSP has two programs: The Premium Assistance Plan and Direct Coverage. The Premium Assistance Plan offers premium subsidies of up to 80%, with a cap of 100% of the MSP’s average premium assistance for the prior year.[32] Direct Coverage is an income-based insurance plan for recipients who do not qualify for the Premium Assistance Plan. COBRA is an option for approximately 65% of the national workforce, but only 7 % enroll because of the excessively high premium costs.[33] Increases in private health insurance premiums, coupled with cuts to many state insurance programs, often make the MSP the only affordable health insurance option for unemployed people.

In 2001, more than $100M from the Medical Security Trust Fund was used for non-MSP reasons.[34] The majority of expenditures from this Fund have been diversions to other health care programs. While such transfers are for worthwhile causes, such as the Uncompensated Care Trust Fund and Catastrophic Illness in Children Relief Fund, a diminished Medical Security Trust fund will adversely impact the effectiveness of the program. 

· UI Finance ·

TAXABLE WAGE BASE

To pay for UI benefits, employers are subject to a state payroll tax on a portion of employee wages called the taxable wage base. The wage base is the first $10,800 of each employee’s wages, regardless of the employee’s total salary (i.e. the same for a $20,000 or $200,000 annual salary). The wage base, which requires legislative action for adjustment, was set at $13,000 in 1992 but changed only months later to $10,800. It has not been increased from $10,800 in the past 11 years.

EXPERIENCE RATING

The amount that employers contribute on the taxable wage base varies on several factors, including experience rating. This merit-based system links payments to the amount of benefits paid to their former employees. Experience rating is designed to create parity in UI costs by requiring greater contribution from those who use the system the most. Therefore, employers with more layoffs and whose employees collect more UI benefits are required to contribute to the Trust Fund at a higher rate in the following year. Massachusetts has a "modified" experience rating system, which places limits on how much or little an employer must contribute, regardless of the amount of layoffs.

To determine experience rates, DET administers an account for each employer called the employer reserve account, which documents all UI payment and benefit activity. DET assesses each employer’s reserve account when it pays benefits to a former employee or when the employer makes UI payments to the Trust Fund. At the end of each September, DET divides each employer’s account balance by the employer’s total covered wages to determine the reserve percentage. An employer with more benefits paid to former workers than overall contributions will have a negative percentage. Conversely, an employer with more contributions than benefits paid to former workers will have a positive percentage.[35] Table 1 shows the specific contribution rate assigned to every account reserve percentage.

As the UI system is "modified," it has maximum and minimum limits on employer payments. Currently, an employer’s maximum annual contribution is $780/employee, and minimum annual contribution is $143/employee, regardless of the amount of layoffs.

RATE SCHEDULES

Another
mechanism to adjust employer contributions and maintain Trust Fund reserves is rate schedules. If high benefits are paid from the Trust Fund that deplete the balance during any given year, the following year requires a higher "schedule" of payments. There are eight schedules and each contains different employer tax rates to adjust total contributions to the Trust Fund for the following year. Each schedule has a letter ranging from "AA", the lowest level of employer contribution, to "G", the highest.  As outlined in Table 2, the Trust Fund’s reserve percentage (ratio of wages to balance) automatically determines the schedule
of contribution.[36]

The reserve percentage of the Trust Fund has a trigger mechanism to automatically increase the schedule if the balance becomes too low relative to wages. Currently, each schedule change adds or removes approximately $120M in employer contributions to the Trust Fund, which is approximately $40/employee per year.[37] Massachusetts is currently at a Schedule "B", which provides about $925M to the Trust Fund each year at an average cost of $362/worker to businesses. A shift to Schedule "C" would have increased business costs to approximately $40/employee and overall contributions to $910M.

The trigger automatically establishes the rate schedule each year based on the Trust Fund reserve percentage. The Legislature has pre-empted this mechanism for nine of the past ten years to reduce business UI costs. In 2002, the state had a total covered payroll of $113.6B and a Trust Fund balance of $812M, which would have triggered a "G" schedule.

TABLE 1. How rate schedules work:

1.        Divide the end of the year UI Trust Fund balance by the state’s total covered payroll to determine the reserve percentage: $812M/113.6B = 0.7%.

2.        The 0.7% reserve percentage matches a rate Schedule "G".

3.        In 2002, the automatic trigger was overridden and set at a Schedule "B".

4.        Employers account reserve percentage has a contribution rate for Schedule "B". The employer pays this rate (e.g. 7.3%) on the taxable wage base of each employee.

TABLE 2. How experience rating works:

4.1     Employer A had a negative account balance after higher benefit payments to former employees than contributions to the Trust Fund. Divide Employer A’s account reserve balance, which was negative, by wages to determine the reserve account percentage. Employer A’s account reserve balance comes to –14%.

4.2     Under schedule "B", a negative 14% has a 7.225% assessment.

4.3     Multiply 7.225% x $10,800 (taxable wage base) = $780, the per/employee cost.

The UI benefit and finance system in Massachusetts is similar to programs in the rest of the United States. Each state has a system of rate schedules and experience rating, although contributions and solvency requirements vary based on the state’s economic circumstances. Massachusetts offers a strong benefit package, including the 30-week duration, dependency allowance, and the Medical Security Program. These benefits have proven effective in maintaining consumer spending and allowing unemployed workers to meet basic living needs.

· The Trust Fund is Broken ·

The UI Trust Fund, the mechanism through which UI benefits are paid, will soon be insolvent, meaning it has less money than is necessary for benefit payments. The pending insolvency is primarily the result of a deficient finance structure. As wages have grown over the past decade, employers have contributed to the Trust Fund at a steadily decreasing rate. During the recession of the early 1990s, the Trust Fund had negative balances from 1991 to 1993. Strong economic growth and historically low unemployment rates during the late 1990s allowed the Trust Fund to rebound and build a surplus. Over the past two years, however, high wages, decreasing employer contributions, and 21 consecutive months[38] of job losses have drained the Trust Fund’s surplus. In several months the state will have to borrow money from the federal government to make benefit payments.

In December of 2000, the Trust Fund had a balance of $2B, but Senate Post Audit and Oversight Committee projections now indicate it will end 2003 with approximately $126M. Additionally, in 2002 the state received $193M in unexpected Reed Act funds in a one-time distribution from the federal government. Without this Reed Act disbursement the Trust Fund would have been insolvent much earlier.

UI TRUST FUND (1985 – 2003)
	2002, MA received $193.6M in Reed Act funds.

SOLVENCY

The actual balance of an unemployment insurance trust fund is not as important as other factors. UI is a wage replacement system. Therefore, the ‘health’ or solvency of a trust fund must be measured relative to wages or benefit payments. "A growing trust fund balance can simply reflect a growing economy, not increased solvency in terms of the overall size of the state’s workforce." [39] The two most commonly used solvency indicators are the reserve percentage and the Average High Cost Multiple (AHCM). The reserve percentage is the ratio of the trust fund balance to the state’s total covered wages, essentially providing a snapshot of how much the trust fund has in the bank relative to how much payroll it must cover.

The AHCM measures the duration a trust fund can pay benefits during "moderate" recession-level unemployment. This ratio averages the three highest benefit payment years in the past twenty years and determines how long the Fund could pay benefits at such a level. The DOL and the Advisory Council on Unemployment Compensation recommended a minimum of a 1.0 AHCM, which means a state can pay benefits for one year under such recession conditions.[40] At .59, Massachusetts can pay benefits for only 6 months at "moderate" recession levels before becoming insolvent. This figure is below all New England states as well as the national average of .69.[41]

While the 2002 balance appears to be relatively high, it is important to recognize Massachusetts has among the highest wages in the nation and therefore requires a higher balance to pay this wage replacement benefit. Both of the solvency indicators are below the national average and recommended standards, which reinforces the need to improve the Trust Fund’s condition.

Massachusetts UI Trust Fund Solvency Indicators, Sept. 2002[42]

CAUSES FOR THE DECLINE

The Trust Fund’s pending insolvency is a result of the state’s inadequate finance mechanism, high wages, and increased unemployment. Massachusetts has not adjusted the taxable wage base since 1992, which has prevented contributions from matching wage growth and, subsequently, benefit payments. In fact, despite substantial wage growth, the average employer UI contributions have decreased from $468/employee in 1993 to $310/employee in 2002. Without a reliable trigger, there is no effective mechanism to link employer contributions to wages.

 

While increases in unemployment have exacerbated the Trust Fund’s problems, high unemployment is not the primary cause of insolvency. After historically low unemployment rates in the late 1990s, the flaws in the finance system were exposed. Unemployment rates and benefit exhaustion have increased and therefore placed additional strain on the Trust Fund. During this current recession, unemployment in Massachusetts remains relatively modest. At a 5.3% unemployment rate, Massachusetts is better off than 28 states and below the national average of 5.8%.[43] When the Trust Fund was insolvent in the early 1990s, the state had an unemployment rate above 9%.[44] This suggests the decline of the Trust Fund from 2000 to 2003 is more attributable to high wages and low employer contributions than increased unemployment.

CONSEQUENCES OF INSOLVENCY

The Trust Fund becomes insolvent when Massachusetts is required to borrow from the federal government to pay UI benefits. While borrowing allows employers to postpone payments until a potentially better business climate, it can cost tens, if not hundreds, of millions of dollars in interest payments and lost Trust Fund earnings. In 1992, Massachusetts had to institute additional employer contributions for three years to repay loans and interest from several years of insolvency. During this period employer costs increased from $390/employee in 1992 to $484/employee in 1994.[45]

As the Trust Fund balance declines, Massachusetts sacrifices interest income that could be used to offset employer contributions. In 2000 and 2001, the Trust Fund earned an average of $127M per year in interest[46]. In 2003 and 2004, DET projects $34M and $9M, respectively, in interest income. These foregone earnings alone could increase annual employer costs approximately $30 to $40/employee.[47]

Without structural reforms Massachusetts will continue to face UI funding crises during each economic downturn. The original concept of the unemployment insurance system was to maintain relatively high fund balances during periods of strong economic growth so employers would not face increased costs during a downturn.[48] The General Accounting Office testified the "reliance on loans and general fund advances has eroded the forward funding principle" of UI.[49] Now that the Trust Fund will soon be insolvent, policymakers must either raise employer contributions or cut recipient benefits to fix a broken trust fund.[50]

PROJECTIONS

Currently, DET predicts the Trust Fund will recover in 2004 based on a large increase in employer contributions. While the Agency has been a strong steward of the UI program, it recently advocated against changes to the rate schedule despite the precipitous decline of the Trust Fund.[51] In the 2003 First Quarter Trust Fund Report, the agency predicts recovery in 2004, but states "we believe that the current forecast’s 2.9% annual wage and salary growth rate must be viewed with some caution, as there is little evidence at this moment of the kind of employment growth, compensation increases, or generalized inflationary pressures that would have to occur either individually or in combination in order to produce this outcome."[52]

The Senate Post Audit and Oversight Committee projects the Trust Fund will end 2003 with approximately $126M, less than half of DET’s prediction. Data from the first three months of 2003 suggests benefit payments may be higher and employer contributions may be lower than previously projected. This will deplete the Trust Fund even faster and the state will have to borrow money when the closing balance is less than the following month’s benefit payments. The $126M projection for December 2003 is likely to be less than benefit payments required for January 2004. Additionally, the Trust Fund receives low contributions for the first four months of a year, since most employer contributions are not received until May. Therefore, the state could develop a significant deficit in the first four months of 2004.

The projected December balance will not have enough funds to cover benefit payments for January 2004.

As projections for the Trust Fund are tied to the unemployment rate, it is critical to monitor job growth and other economic indicators that will impact UI benefit payments. There continue to be mixed signs about economic recovery, but recently DOL reported that February 2003 unemployment rates were significantly higher than expected.[53] A panel of Massachusetts economists indicated the state’s consumer confidence is currently at the lowest level since 1992 and the state’s job market may not improve until 2004.[54] Any economic forecasts must be viewed with the additional uncertainty created by the war in Iraq, as well as ongoing security concerns. This continued insecurity about economic recovery reinforces the need to rebuild and protect the Trust Fund.

UI TRUST FUND FINDINGS

·        The solvency of the UI Trust Fund is in a state of crisis. Without corrective measures Massachusetts will have to borrow money from the federal government to pay benefits in the next several months.

·        Two leading solvency indicators demonstrate the Massachusetts UI Trust Fund is below national averages and recommended standards.

·        Employer UI contributions have decreased 34% over the past six years, which has contributed to the decline of the Trust Fund.

·        As the Trust Fund balance declines, the state loses tens of millions of dollars in interest earnings.

·        If the state is forced to borrow through FUA loans, employers may face additional UI taxes to cover principle and interest payments.

·        Without structural changes to UI finance, the Trust Fund will continue to face periods of insolvency in the future.

·        Trust Fund insolvency may force policy-makers to either increase employer contributions or cut benefits.

· Findings & Recommendations ·

· Rate Schedule ·

Through rate schedules, the Massachusetts UI system automatically adjusts employer contributions to ensure sufficient Trust Fund reserves. As the taxable wage base has not increased since 1992, the rate schedule is currently the only mechanism to regulate contributions to the Trust Fund on an annual basis (experience rating is an employer-driven cost based on layoffs, but has no connection to increases in employee wages).

Each schedule change increases employer contributions to the Trust Fund by approximately $120M.[55] If the Trust Fund ends 2003 with $126M, the rate schedule will shift from "B" to "G" next year and average employer costs will increase 66%, from $362 to $598. A schedule "G" would have a significant impact on the business climate in Massachusetts and the employer community would most likely lobby against such an increase.

As each schedule change poses substantial new costs to businesses, the Legislature has overridden the UI trigger on numerous occasions over the past decade. As the chart indicates, these overrides have saved the employer community more than $1.6 B over the past ten years.

Employers complain about the "unpredictable" nature of the trigger, as the Legislature generally waits for end of the year balances before making schedule decisions. An indexed wage base that links contributions to wage and benefit inflation each year would provide stability to employers. If employers do not accept rate increases, they may face the need for a different form of annual adjustment.

The employer community has offered reforms that include decreasing the amount of reserves required for each rate schedule. If passed, this would essentially result in a permanent decrease in employer contributions and a lower standard for Trust Fund reserves moving forward. For 2003, this would have shifted the trigger rate from "G" to "F", saving the employer community more than $100M, but not improving the Trust Fund’s balance. This legislation would simply aggravate Massachusetts’ Trust Fund solvency problems, which are already among the worst in the nation.

· Taxable Wage Base ·

UI is a partial wage replacement benefit. In order to maintain solvency, employer contributions must be linked to employee wages. This is critical because every year UI benefits are adjusted to reflect such wage increases. The taxable wage base is the only component in the UI system that can be adjusted annually to account for wage fluctuations. There has been no increase in the taxable wage base since 1992, and the Trust Fund has been unable to keep pace with salary inflation. The Massachusetts unemployment rate has been approximately 5% since 2001. During this time, benefit payments have been more than one billion dollars higher than employer contributions.

Over the past 11 years, wages in Massachusetts have increased 73% and experienced the fastest growth in the United States in 2000.[57] The chart below indicates the taxable wage base has decreased from 38% of wages in 1992 to 24% of wages in 2002. As UI is a wage replacement benefit, decreasing contributions place a tremendous strain on the Trust Fund. If not for historically low unemployment rates and benefit outlays in the mid- to- late 1990s, the Trust Fund would have deteriorated much earlier.

The state’s low taxable wage base also places a disproportionate burden on low-wage employers. For example, an employer who pays a $20,000 salary is paying UI tax on more than 50% of the employee’s wages, whereas an employer who pays a $100,000 salary is paying costs on only 10% of the wages. Therefore, low-wage employers are paying disproportionately higher UI costs than high-wage employers. As employers may decrease wages to offset benefit costs, the low taxable wage base in Massachusetts disproportionately affects low-wage employees. The Advisory Council on Unemployment Compensation states "the low taxable wage base within the Unemployment Insurance System is both regressive and unfair."[58]

The Legislature recognized the low taxable wage base in 1992 and originally increased it to $13,000. This increase was subsequently repealed and the taxable wage base was set at $10,800. In 1992, the $10,800 taxable wage base was 38% of the average wage in Massachusetts. The following table indicates the projected revenue for increases to the taxable wage base.

Impact of Taxable Wage Base Adjustments

Senate Post Audit and Oversight Committee projections based on DET estimates and a Modified Schedule "B"

Massachusetts has the third highest wages in the country, yet the $10,800 taxable wage base ranks 15^th. In the Northeast, Massachusetts is lower than Connecticut, Rhode Island, and Maine, and is less than half of New Jersey’s taxable wage base.