UNEMPLOYMENT INSURANCE Serving North Dakota

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UNEMPLOYMENT INSURANCEServing North Dakota

• Interim Commerce Committee Hearing
• Minot, North Dakota
• November 13, 2003

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Objectives

• Discuss Federal Role in Unemployment Insurance
• Discuss funding of Unemployment Insurance (UI)
  System
• Review 1999 UI Legislation
• Discuss Results of 1999 Legislation
• Other Issues

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Unemployment Insurance System

• The Unemployment Insurance System was created as
  part of the Social Security Act of 1935. Its
  purpose was to to alleviate personal hardship for
  workers unemployed through no fault of their own
  and to stabilize the economy.

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Federal Role in Unemployment Insurance I

• Federal law (Social Security Act and the Federal
  Unemployment Tax Act FUTA) require that state
  UI laws conform to federal requirements, for
  instance
• - Experience rating as the basis for setting tax
  rates.
• - Failure to conform could result in all
  employers in that state losing their 5.4 FUTA
  tax credit.

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Federal Role in Unemployment Insurance II

• States must also comply with UI program
  requirements.
• Example States must
• -cooperate with federal agencies charged with
  administration of unemployment compensation
  laws.
• - Ensure that wages subject to FUTA are also
  subject to SUTA.
• Could result in loss of FUTA credit, and loss of
  administrative operations grant.

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Federal Role inUnemployment Insurance III

• Federal government suggests model for UI Trust
  Fund solvency
• Not a mandate on tax rates or solvency level
• If states UI Trust Fund goes negative, can
  borrow from federal government
• Must pay interest on amount borrowed.
• Cannot repay loan using UI tax revenues.

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Reiterating -Consequences ofFederal
Non-conformity or Non-Compliance

• States employers no longer receive FUTA tax
  credit
• FUTA tax rate goes to 6.2 for all employers in
  the state
• State could lose its UI administrative funding.

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How is theUI Trust Fund funded?

• ALL State UI taxes collected from North Dakotas
  employers
• go into the UI Trust Fund

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What can theTrust Fund be used for?

• The UI Trust Fund may only be used to pay
  unemployment insurance benefits

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Who pays administrative costs to deliver the
program?

• Using the FUTA tax, the federal government funds
  the administrative costs to deliver the UI
  program in each state.
• Some States have supplemented this funding with
  State funds from several sources.

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Is this a good dealfor North Dakota?

• North Dakota employers pay more in FUTA taxes
  than the state gets back in funding to administer
  North Dakotas unemployment insurance and
  employment service programs.
• For instance, our 2002 estimate indicates that
  North Dakota employers paid 13.9 million in
  FUTA, and JSNDs UI/ES grant was 12.5 million.

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How are tax rates determined for businesses?

• UI Trust Fund financing is based upon Experience
  Rating principles
• Employers who do not control their costs pay more
• The greater an employers risk, the more the
  employer must pay

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Unemployment InsuranceExperience Rating

• Experience Rating The mechanism in the tax
  schedule that determines the rates assigned to
  each covered employer based on the employers
  experience

• Negative experience rating means the
  accumulated benefits charged to an employers
  account exceed the accumulated contributions.

• Positive experience rating means the
  accumulated total contributions paid by an
  employer exceed the accumulated benefits charged
  to their account.

• New Employers with less than three years
  experience are assigned a New Employer rate
  based on whether they are construction or
  non-construction employers.

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1999 Legislation(HB 1135) Goals

• Stabilize average UI tax rate
• Shift part of the negative burden from
  positive balance to negative balance
  employers
• Raise UI Trust Fund balance to solvency target
  Over seven-year period

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1999 Legislation Reasons

• UI tax rates were extremely volatile, especially
  in the 1980s
• For example,
• 1984 3.55 Change
• 1985 3.12 -0.43
• 1986 2.88 -0.24
• 1987 4.17 1.29
• 1988 2.79 -1.38
• 1989 2.31 -0.48
• 1990 1.64 -0.67

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1999 Legislation Reasons

• Trust Fund balance diverged from the solvency
  target in the late 1990s
• Tax income to the fund from 1994 to 2002 was less
  than benefit payouts

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1999 Legislation

• Created arrays for tax rates
• Currently set at 10 for positive balance
  employers
• Currently set at 10 for negative balance
  employers
• Arrays created an incentive for employers to
  manage their risk more effectively

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1999 Legislation

• Imposed rate limiters that restricted an
  employers tax rate increase to 30 per year for
  the first three years (2000-2002) of the
  legislation
• Rate limiters expired in 2002, forcing a change
  in many employers 2003 tax rates.
• Job Service was proactive in notifying employers
  of the change and explaining the reasons behind
  it.

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Tax Rate Arrays

• Positive Balance employers
• Ten rates that range from 0.49 to 1.39 in
  one-tenth intervals (2003 rates-same as 2000-2002
  rates)

• Negative Balance employers
• Ten rates that range from 6.49 to 10.09 in
  four-tenths intervals (2003 rates -same as
  2000-2002 rates)

See jobsnd.com for details on how employers fit
into each array
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Would it be beneficial for each array to have 20
different rates instead of 10?

• More rates in each array would make rates
  fluctuate more often as employers are
  redistributed within each array
• UI tax rates are a zero-sum game
• x number of employers must generate x amount of
  tax revenue to hit the desired trust fund balance.

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1999 Legislation Results

• Goal Stabilize UI tax rates
• Since 1990,
• 1990 1.64
• 1991 1.23
• 1992 1.48
• 1993 1.49
• 1994 1.22
• 1995 1.12
• 1996 0.86
• 1997 0.87
• 1998 1.10
• 1999 1.12
• 2000 1.26
• 2001 1.28
• 2002 1.31
• 2003-2006 Projection 1.57

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1999 Legislation Results

• Goal Shift burden from positive balance
  employers to negative balance employers
• Negative employer deficit
• 1997 7.0 million
• 2002 4.5 million

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1999 Legislation Results

• Goal Raise UI Trust Fund level to solvency
  target

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1999 Legislation Results

• Goal Raise UI Trust Fund level to solvency
  target
• Trust Fund level rising with new rate structure
• Progress through 2002 impeded by rate limiters

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Trust Fund Solvency

• The UI Trust Fund requires a reserve for the same
  reason every other insurance program requires a
  reserve -to protect the Fund against a
  catastrophic event (such as a large number of
  business closings or major employer layoffs)

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Trust Fund SolvencyCould the reserve dissolve?

• If benefit payments rose in 2003-05 at the same
  rate they rose in 1975-77, the UI Trust Fund
  would be bankrupt by 2005, without substantial
  rate hikes
• 1975-77 was not even the worst economic downturn
  North Dakota experienced in the last 30 years

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Graphic Illustration
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Trust Fund Solvency

• It is crucial for the Trust Fund to reach the
  solvency target
• The solvency target is set to protect against the
  highest benefit payout periods in recent history
• The overall purpose of the UI program is to
  soften the impact of an economic downturn

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How is the Trust Fundsolvency target set?

• Federal government suggests model called the
  Average High Cost Multiple (AHCM)
• Equals one year of benefit payments, without
  additional revenue, at a rate equal to the
  average of the 3 worst benefit years in the last
  20 years
• North Dakota altered the model (MAHCM), using the
  highest benefit payout year in the last 20 and
  the two highest benefit payout years in the most
  recent 10-year period
• Altered model results in a lower target

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Trust Fund Reserve Target
Dramatic decline in 2006 2007

• Solvency Target
• Year Millions
• 2000 76.2
• 2001 76.2
• 2002 75.6
• 2003 71.4
• 2004 73.0
• 2005 74.7
• 2006 63.0
• 2007 56.7
• 2008 56.0
• 2009 56.6
• 2010 57.9
• 2011 59.2
• 2012 57.6
• Planned year to reach solvency target.

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Average Weekly Benefit Amount/Duration 2002

• Average weekly benefit amount 219.27
• Average claimant duration 11 Weeks
• Average benefit payout 2,412

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Other Issues

• Would North Dakota be better off without federal
  requirements?
• Employers would lose FUTA tax credit
• Less stringent guidelines would destabilize
  economy during a downturn
• - Could effect interstate agreements providing
  capacity for multi-state and interstate claims

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Other Issues

• Why isnt the UI program more like Workers
  Compensation?
• No one wants to file a workers compensation
  claim not the employer, the worker, or the
  state
• There are valid economic reasons why employers
  may want their workers to file UI claims
• Inventory
• Temporary lack of demand
• Seasonality
• Others
• (((These reasons make a pay-as-
• you-go system undesirable)))

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Summary

• Effects of 1999 legislation
• UI average rates stabilized
• Burden has shifted from positive balance to
  negative balance employers
• Reserve is slowly rising to meet solvency target
• Progress should be quicker now that rate limiters
  have expired.
• Reserve scheduled to be at solvency
• target by 2007

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Summary

• Job Service North Dakota
• Will continue to work with employers to explain
  their UI tax rates and the effects of the 1999
  legislation
• Will continue to monitor the effects of the
  legislation and report back to the Legislature
  and businesses
• Will continue to assign fair and accurate UI tax
  rates
• Will continue to provide excellent customer
  service to the business community

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Questions?