Louisiana has burned through nearly half of the $1 billion fund it uses to pay benefits to unemployed workers and could deplete the fund within 10 to 14 weeks if jobless claims triggered by the coronavirus pandemic remain near current levels.
The unemployment fund also has fallen to a level that will automatically trigger higher wage taxes on businesses starting in January to help replenish the fund. The same trigger also would reduce the maximum $247 unemployed workers receive weekly to $221 in January.
Even if the fund runs dry, unemployed workers would still get payments because the state is required to keep paying eligible claims and has options to borrow additional funds as other states have done, said Ava Dejoie executive director of the Louisiana Workforce Commission.
"This is an area we are certainly beginning our research to borrow money from the federal government. It's not an option to not pay benefits," Dejoie said. "We must make our trust fund solvent."
With about $550 million remaining in the fund, the agency is basing its 10- to 14-week depletion estimate on current payouts of between $40 million and $50 million each week to more than 300,000 unemployed workers in the state. It's a level the state has exceeded since roughly mid-May, even with businesses being allowed since May 15 to partially reopen in a phased recovery after stay-at-home orders were imposed in mid-March and triggered worker furloughs and layoffs.
Currently, most unemployed workers also receive $600 per week that is federally funded on top of their state unemployment stipend. The federal subsidy, which some have complained encourages people to stay on unemployment because they make more money than being on a lower-wage job, is set to expire at the end of July.
The Louisiana unemployment trust fund, which took in $269 million last year, had more than $1 billion in the bank in September 2019 and was on track to hit $1.13 billion by September this year. That would have been the highest fund balance in the past decade.
Businesses are still paying taxes into the fund and collections were down about 10% in the first three months of the year, according to the Louisiana Workforce Commission. For the April-June quarter, employers are being allowed to delay payments. Employers pay unemployment insurance taxes on the first $7,700 of worker wages to the state.
"We don't know how much we will actually receive for the second quarter" from businesses, Dejoie said. "It's a sobering realization."
The Louisiana Workforce Commission is evaluating its options to replenish the fund, which could include borrowing money from the Federal Reserve at zero percent interest as some other states have done.
Before the economic recession, Louisiana was better positioned than many other state funds that have already run dry.
"Louisiana had an adequate solvency level. It was not terribly high but it was above the minimum amount that the federal government suggests," said Jared Walczak, director of state tax policy at the Tax Foundation in Washington D.C., an independent nonprofit.
When a state does begin to run out of money it applies for loan advances from the U.S. Treasury so benefits are not interrupted. California, Connecticut, Hawaii, Illinois, Massachusetts, New York, Ohio, Texas and West Virginia have authorization to borrow money to replenish unemployment trust funds.
"The problem is longer term for states that need to pay these advances back. They have the potential to generate a significant amount of debt, which means you typically raise unemployment taxes on businesses," Walczak said.
Beyond that, the economy is especially fragile and raising the taxes penalizes companies that are already being incentivized to rehire workers through other federal stimulus programs.
"When you have a crisis of this magnitude rates can skyrocket just at a time when businesses are trying to rehire employees and the entire policy goal is to get these people back into these jobs," he said. "A lot of this is going to be a timing issue: how long states can hold out not raising unemployment insurance taxes and ultimately how high they can go after this."
After an oil bust bludgeoned Louisiana's economy in the 1980s, the state borrowed money to cover an otherwise bankrupt unemployment trust fund. In 1987, the state sold $1.3 billion in bonds to repay $780 million the state owed the federal unemployment trust fund. That same year, the state cut benefits and increased the tax on businesses.
The bonds were repaid ahead of schedule by 1994. Then one year later the Legislature approved a mechanism that automatically increases or decreases worker benefits and increases the tax rate on businesses, depending on how much is left in the fund.
Those triggers are still in place.
If there is between $400 million and $750 million in the state trust fund this September, businesses should expect in January to pay taxes on the first $8,500 in wages, rather than the current $7,700, in addition to a 10% increase on the employer's tax base. Maximum benefits going to unemployed workers would drop from $247 per week to $221, which would be the lowest in the nation.
The tax change would impact more than 80,300 businesses with fewer than 10 workers and more than 22,900 businesses with fewer than 50 workers. There are only about 1,200 companies with more than 500 workers that pay taxes in Louisiana.
So the "lions share" of the higher unemployment insurance taxes would largely fall on small businesses, Dejoie said.
Because it's funded through the unemployment trust fund, the state also would halt any funding for its incumbent worker training program. The program assists business and industry in developing skills of existing employees to improve productivity and grow companies.
Some states have taken funds approved by Congress in the coronavirus-inspired CARES Act and used it to replenish unemployment trust funds. So far, Louisiana lawmakers have voted to carve out $300 million for small business grants and other programs.
It's unclear what might happen in Louisiana's political arena with other federal funding.
“If I had to choose between CARE Act money going into the (unemployment) trust fund or making sure a laid-off worker pays rent, I would go for the rent” through rental assistance programs, said Jan Moller, director of the Louisiana Budget Project.
The existing unemployment system is already weak for workers, Moller said.
“While the trust fund may have been healthy, the social safety net was not,” he said.
There are still another nearly 200,000 workers who are independent contractors slated to lose federal benefits at the end of July. The extra $600 per week federal stimulus does not impact the state unemployment trust fund situation.
“We are living in a false economy right now, and we’re going to see the real economic toll on workers no longer working soon,” Moller said.
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