When a report in February showed Indiana had the nation’s sixth worst solvency rate, Gov. Eric Holcomb’s administration proposed a tax increase of about 17 percent for businesses to get the state’s unemployment trust fund to a level recommended by the federal government.
The Indiana Legislature didn’t bite. But, as a June 2 Journal-Gazette report on the issue noted, that just delayed the decision until the 2020 legislative session. In the meantime, businesses are left out on a limb with the risks of possibly needing unemployment insurance.
According to the 2019 State Unemployment Insurance Trust Fund Solvency Report (oui.oleta.gov), “unemployment insurance taxes, paid primarily by employers on the wages paid to employees, flow into state UI trust fund accounts maintained at the U.S. Treasury. These same accounts are the source of benefit payments to eligible claimants in the regular state UI program. There are no federal requirements for the amount of funds that should be kept in a state’s trust fund, however each state operates on a forward funding basis by building up reserves in anticipation of paying a higher amount of benefits during recessionary periods.”
Scenarios show the complications in handling the issue. On the one hand, it’s nice to have that insurance to be prepared in case of a recession, and raising premiums when the economy is good is easier to handle. On the other hand, some would argue that building a stockpile of funds that might just sit unused is a waste of good money. And yet, if the state waits till recession strikes, then the increase in premiums to fund insurance is going to be a burden on businesses.
It’s risky not to have adequate reserves in place to cover unemployment costs in the event of a recession.
When Indiana went through the last recession, the Indiana fund was spending more than it was taking in, and the state had to borrow money from the federal government to pay unemployment insurance claims in 2008. Businesses received a large tax bill as a result.
Indiana paid out $1 billion or more in three consecutive years during the worst of the recession. Last year, only $251 million was paid in unemployment claims thanks, in part, to a good economy and a low unemployment rate. The current balance in the state’s unemployment trust fund is $830 million.
The House expert on the unemployment system, Rep. Dan Leonard, R-Huntington, told the Journal that Indiana has been proceeding according to plan in its goal to have $1 billion in fund reserves by the end of next year, which is above the U.S. Department of Labor’s original goal for the state. However, the department later doubled its recommendation, meaning Indiana would need nearly $1.8 billion, thus the call for an increase in taxes on businesses.
So the question to ponder over the summer is what to do in case of a downturn in the economy and the need to increase insurance premiums.
What legislators shouldn’t do is kick the can down the road again. Indiana should establish a safe reserve balance, one that anticipates recession-level unemployment, and set unemployment insurance rates accordingly. After all, the proper time to prepare for drought is when it’s raining.