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Dwindling unemployment trust nears crisis point: Fund that once held $1.6 billion may face insolvency

May 19, 2008

Indiana's Unemployment Insurance Trust Fund is running out of money-fast.

It opened this decade with $16.6 billion in assets. By the end of last year, it had dwindled to $302 million. And last month, the Indiana Department of Workforce Development said the balance was just $80 million.

Though DWD in early May received $300 million in taxes collected from employers, the infusion is only a shortterm fix. By year's end, the fund is expected to be short on cash again.

"The bottom line is, our projections right now are that we should be OK for the rest of this year," DWD spokesman Joe DiLaura said. "But we'll be facing some difficulties in early '09, when we'll be in a near-deficit situation."

Indiana uses the UI Trust to pay weekly benefits to the unemployed. It draws its cash flow from employers, who are taxed on the first $7,000 in wages they pay each worker. There are 24 business tax rates, which are based on an employer's history of layoffs.

Legislators debated what to do about the dwindling UI Trust during the last session of the General Assembly, but the issue never took center stage because of the property tax reform push. Lawmakers expect it to be high on next year's agenda.

"There are no easy answers," said State Rep. David Niezgodski, D-South Bend, chairman of the House Labor & Employment Committee. "But these are the times we're in, and these are the times when tough decisions have to be made."

Ironically, seven years ago, legislators were worried that the UI Trust's balance had swollen beyond necessity. So they tinkered with the unemployment tax and spending equation. Though employer taxes rose from $277 million in 2000 to a peak of $578 million in 2005, benefits grew even faster-from $259 million in 2000 to a peak of $746 million last year.

Much of the difference stems from an increase in the generosity of benefits. The maximum weekly payment an unemployed individual could collect 20 years ago was $187. Today, the out-of-work can collect $390 each week, for up to 26 weeks.

Unemployed Hoosiers are also collecting benefits for longer durations than they did a decade ago. Indiana Manufacturers Association Vice President Brian Burton, who has studied the issue for DWD, said that, in the late 1990s, the unemployed took benefits for 10-1/2 weeks on average. Today, they stay on the unemployment rolls an average of 13 weeks.

"That means people are staying unemployed longer. That's not the goal of the system," he said. "The best possible solution to this is gainful employment."

The fiscal problem is now approaching a crisis point that could be exacerbated by the national economy's woes. Indiana's unemployment rate is 5.1 percent. Should the economy sour far worse than expected, mass layoffs could rapidly deplete the UI Trust.

DWD has assembled a special committee to explore every option for restoring the UI Trust's solvency. Some options would reduce benefits. Others would hike revenue.

For example, Indiana could begin taxing employers on more than $7,000 in wages for each employee. Michigan and Ohio each tax the first $9,000. And Illinois taxes the first $12,000.

Alternately, DWD could focus on employers in certain industries that might be gaming the system. Last year, Indiana had 71,280 employers that paid more taxes into the UI Trust than their former employees received in benefits. But 18,120 had the opposite ratio. Their former workers collected more benefits than the companies contributed.

The phenomenon is particularly pronounced in certain industries, like construction, in which employers and employees deliberately plan to leverage unemployment benefits as a source of income every winter, when business slows. Burton argues the UI Trust wasn't intended for that purpose. Instead, it's supposed to be a short-term, emergency form of relief for those unexpectedly thrown out of work.

"Department of Workforce Development has waived [construction workers'] job search requirements," he said. "We think that flies in the face of the statutory requirement to seek employment. We feel that the system has been liberalized, and that has an impact on the trust fund."

The DWD's special committee is expected to deliver its recommendations in late fall. In the meantime, the Indiana Chamber of Commerce is warning businesses to expect a tax hike.

"My gut tells me that it's going to cost employers," said George Raymond, the chamber's vice president of human resources and labor relations.

"I just don't see how we can get by unless we change how we finance it. Hopefully, we can get through until the next legislative session, and have a recommended fix. But I think it's going to be pretty close on whether we can make it to January or not."
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