Unemployment compensation trust funds going bust

Much has been written about the challenges posed by the COVID-19 pandemic. Small businesses are teetering on the edge of bankruptcy, school calendars are changing by the day, the hospitality and tourism industry is dormant, the restaurants are limited, child care centers are half-empty, oil producers need higher prices, and manufacturers need more demand.

2020 has thrown one economic curveball after another. Through it all, many have resigned themselves to just doing whatever it takes to make it through 2020 as unscathed as possible and hope 2021 brings with it a change in our collective luck.

Surely by then, there must be a vaccine, fully open restaurants and schools, an increase in oil prices, a pulse for tourism, a decrease in confirmed cases and lifted small business restrictions. Yep, as the thought goes, 2021 is where it all gets back to normal.

I sure hope that is the case … but there is one issue that must be addressed today to prevent a huge wet blanket from descending on the 2021 recovery dream.

Unemployment Compensation (UC) trust funds across the land, especially in Louisiana, are about to go bankrupt. If they do, massive tax increases will go into effect next year to stall any recovery that is trying to take root.

This is how it works:

Workers unemployed for COVID-19- related reasons have filed UC claims in unprecedented numbers since March, and they continue to file. In less than five months, these claims burned through over $850 million of Louisiana’s $1.05 billion funds and are projected to leave it insolvent by the end of September. At that point, Louisiana will have to ask the federal unemployment trust fund for the monies it needs to cover UC benefits for its workers.

While this situation is certainly concerning, it is by no means unprecedented. The fund has taken two other serious hits in the past – the unemployment during the 1980s recession that arose from the oil bust and the unemployment from the combined impacts of hurricanes Katrina and Rita in 2005. In both instances, close to $1 billion in UC benefits were paid out.

These experiences taught state leaders not to take the UC fund’s solvency lightly. The legislature established a system of “triggers” in law that relate to the trust fund’s level. In times of high unemployment, as the fund balance declines, tax increases and benefit reductions are triggered at certain points to protect the fund’s solvency.

Unfortunately, the rate of decline occurring now was not initiated by an economic downturn. That decline has been so rapid that it prevents these triggers from cushioning the fall like they were intended. Nevertheless, they can eventually rebuild the fund over time. The effects of these triggers will become operational in January when employers will pay considerably higher taxes, and claimants filing next year will receive a lower UC benefit.

While it is no consolation, Louisiana will not be the only state dealing with its UC trust fund’s insolvency in the age of COVID-19. About 15 states already have insolvent funds, and many more will be joining Louisiana before 2020 comes to a welcome end. The concern is whether 2021 will give Louisiana a better economy that permits employers and the trust fund to recover.

How did the money get into the UC fund in the first place? Well, Louisiana’s unemployment system is exclusively funded by employer taxes. Job creators pay a state tax used expressly to finance our trust fund. They also pay a federal tax to cover state and federal UC administration costs, as well as to finance a separate federal trust fund that exists to pay UC benefits to the unemployed in states whose funds run out of money to pay their claims.

The monies from our state UC trust fund are there for those rainy days when Louisiana’s economy falters. They are a lifeline for workers and their families during such times. The fund was created to help during bad times, but no one ever envisioned the largest shutdown of an economy by the government we have ever seen. The shutdown is the reason there are so many unemployment claims paid so far this year.

LABI is exploring all options for relieving employers of some of the substantial tax burden looming next year while maintaining state UC benefits at or near their current level. We worked with Sen. Mike Reese and Rep. Larry Frieman this session to pass legislation to soften the impact of these tax hits this year. The governor is also concerned with the solvency of this fund and has expressed his support for finding a fix. We are reaching out right now to Louisiana’s congressional delegation, as well as the legislative leadership and other stakeholders, to determine potential solutions for this unprecedented situation.

An insolvent fund is bad for everyone, which is why everyone is on board to find a fix that works. If we don’t, massive tax hikes await Louisiana’s businesses in 2021 at a time when they will be least able to afford it.

If we want the 2021 economy to be any better than this year’s version, we’d better act today to help save tomorrow.