DOVER — Vermont’s unemployment insurance trust fund is on a fast track to broke.
The state will borrow federal money, will raise the amount of money subject to employer taxes, and has frozen benefits for four years, measures to prevent the fund from running dry in January, according to Vermont Department of Labor Commissioner Patricia Moulton Powden, who spoke recently with 11 business owners at Mount Snow at the first of six statewide meetings to describe the crisis and its potential solutions.
The proposal advocates a combination of revenue and benefit changes to the unemployment insurance (UI) fund, the pot from which all unemployment benefits are paid.
Benefits are designed to support not only the unemployed, but also their local economies. The more cash people have in their pockets, the more they spend on groceries, fuel, or shopping at local businesses.
How the fund works
Cyndee Frere, owner and manager of the Snow Goose Inn in Dover, one of the business owners attending the meeting, described “a feeling of helplessness over the unemployment insurance issue. No matter what you do, it’s costing you money.”
Dollars flow into the UI fund from employers via taxes on the first $8,000 of each employee’s wages, a figure that is set to rise to $10,000 in January.
The first tax, a federal tax called FUTA, pays for administrative costs associated with managing the fund.
The second, a state tax known as SUTA, directly funds unemployment benefits: money from this fund goes entirely to benefits for the unemployed. Vermont employees can collect a maximum benefit of $425 for 26 weeks.
Employers’ SUTA tax rate is determined by an “experience rating” based on how many times they’ve laid off employees, and the overall value — health — of the UI fund.
An experience rating resembles a car insurance premium. A good driver with few accidents or claims pays less, unlike drivers with loads of accidents or claims. An experience rating stays with a business for three years even under new ownership.
In addition to experience rating, a business’s rate is determined by the health of the overall fund. This rate ranges from 0.4 percent to 1.3 percent, and employers now pay 1.1 percent.
SUTA tax rates vary in this way to ensure that the UI fund is replenished in times of low unemployment and sustained when the jobless rate increases.
That’s how it works in theory. In practice, “the fund should have been more replenished over the good times,” says State Rep. John Moran (D-Windham/Bennington-1), who serves on the Unemployment Task Fund Reform Study legislative task force established in June.
Moving toward insolvency
The Unemployment Insurance Reform Proposal, updated April 3, states that for many years, Vermont had a healthy UI fund, Powden told the business owners. For years, there was enough money in the fund to pay benefits.
But as early as 2001, benefits paid out surpassed contributions, and the fund balance began to decline.
Moran cites a few factors behind the fund’s flirtation with red ink.
In 1983, the $8,000 on which employers pay SUTA represented half a Vermont worker’s median salary.
However, as wages have increased over 26 years, the $8,000 threshold has not changed.
Another factor comes from employers seeking to avoid paying unemployment insurance, worker’s compensation, and other costs associated with employee benefits by classifying workers as “subcontractors.”
Finally, Powden and Moran both describe an imbalance in the seasonal quality of Vermont’s economy, with employers who regularly fire-and-hire taking more money from the UI fund than they pay in.
When asked why the UI fund’s solvency was not addressed sooner, Powden answered that a report had been submitted to the legislature in 2003, but no action was taken.
“Politically, this is a hard topic to discuss,” Powden said.
“Action gets taken when it becomes a priority of the administration,” Moran said, charging that Governor Jim Douglas’s solution has been to propose cutting unemployment benefits to keep the fund stable.
“Cutting benefits is highly counterproductive,” Moran said.
Reversing the flow
According to Moran, replenishing the health of the UI fund requires a two-pronged approach.
The immediate issue will be to make sure the state can pay benefits to unemployed workers in January 2010. The second issue to address will be the long-term health and “equality” of the UI fund, said Moran.
Moran pointed out that in the past, some employers who regularly contributed to the fund were pulling the weight fo other businesses that should have been contributing.
In addition to raising the $8,000 SUTA threshold to $10,000, the state will also borrow funds from the federal government to keep the fund solvent.
The legislature also froze the maximum unemployment benefit amount at $425 for 26 weeks. There will be no cost-of-living increase until the federal loan is repaid over three to four years.
In addition, the VDOL is proposing other changes such as certain administrative fees and reducing the maximum weekly benefit from $425 to $409.
Moran says the Unemployment Task Fund Reform Study wants to hear from employers and employees on the subject of unemployment insurance and how best to make Vermont’s UI policies more equitable for everyone.
“We don’t want to come up with a quick solution or a system that’s unfair,” he says.