Today we hear daily reports of a troubled economy and rising unemployment around the nation and in Wisconsin. Many of us may know a friend or family member recently laid off or worried about losing his or her job in the near future. Our state’s Unemployment Insurance program is available to help displaced workers in times like these.
In fact, in 1932, Wisconsin was the first state in the nation to enact an unemployment insurance plan, in response to the Great Depression when more than 25 percent of the workforce was unemployed.
The Unemployment Insurance (UI) program was designed to encourage stable employment practices by providing a temporary source of income for employees laid off from work. Each state operates its own UI system, but federal laws maintain minimum standards and may provide assistance to states when their reserve funds become insolvent. The reserve fund consists of all the contributions and payments made by employers, and by law can be spent only on benefit payments to unemployed workers.
After the 1930s, the next period of economic stress was in the 1970s and early 1980s. Some of us may remember 21-percent interest rates, high inflation and unemployment, and a sharp downturn in manufacturing and industry.
I distinctly remember economic problems at that time. I had worked my way into management in a steel fabrication shop. Work orders were slowing down, so we cut back on our employees’ hours and kept them busy by having them clean and maintain all of the machines and take inventory of supplies. Finally, there were no other options, and it was my unfortunate duty to lay off five employees three weeks before Christmas. I know my employer was not alone in making this difficult decision, as times were tough all over our state.
1980s review
With a state unemployment rate of over 11 percent in the early 1980s, let’s review what happened to Wisconsin’s Unemployment Insurance program at that time.
Because of the increase in benefits claims, Wisconsin’s UI reserve fund began to dwindle and was depleted by 1983. As a result, the state had to borrow $737 million from the federal government to finance the shortfalls of the 1980s.
Steps were necessary to make the system solvent again. In Wisconsin, the Unemployment Insurance Advisory Council is charged with advising the Legislature and administration on matters related to unemployment insurance. This council is composed of five members representing business interests and five representatives of labor interests.
At the time of the 1980s crisis, the council was required to reach unanimous consent on a plan, but it failed to do so. Without the aid of the council’s advice, legislative leaders were forced to craft their own plan. Ultimately, the Legislature enacted significant changes and schedules to the program in 1983 and 1985 in order to begin reducing the deficits, pay back loans and interest, and get the system back on track.
In each case, unemployment taxes were increased and benefits were reduced. Automatic benefit increases, or “indexing,” were repealed, since they contributed to pushing the fund into insolvency.
The additional funds generated by the changes were used to pay off the debt owed to the federal government. However, paying back federal loan interest out of the reserve fund is prohibited. So, a special assessment on employers was created to fund the interest payments.
As the fund improved, the $737 million principal on federal loans was repaid at the end of 1986 and $125 million in interest charges was paid off by 1989. Eventually the assessment was lifted and the tax rate was lowered for employers in good standing.
Fast forward
Wisconsin’s reserve fund increased steadily throughout the 1990s, but the fund balance decreased each year since 2000, reflecting the effects of the recession of 2001 and 2002. The balance decline during the recession was expected, but revenue continued to drop in the years after, when the state’s economy was performing well.
In the last session of the Assembly, I was the chairman of the Committee on Labor and Industry. Learning that the reserve fund was in decline, I worked closely with the UI Advisory Council to take a serious look at the issue. Proactive measures were necessary to increase the fund balance to prepare for the looming recession we all felt was on its way.
As we saw in 1983, failing to fund benefits during a recession can lead to borrowing from the federal government; causing a sharp increase in taxes, decreases in benefits and a reduction in federal tax credits for employers.
The main issue under consideration last session was an adjustment of the “wage base.” Unemployment Insurance taxes are payroll taxes, calculated by applying tax rates to employers for each worker’s taxable wages, sometimes called the “wage base.” Since 1986, Wisconsin’s wage base has been defined as a tax on the first $10,500 of wages paid to each employee per year.
Because the reserve fund balance continued to grow throughout the 1990s, consideration was not given to adjusting the wage base at that time. But after the recession in the early 2000s, it became clear that the wage base was no longer keeping pace with modest growth in wages and benefits, thus contributing to slower revenue growth in the reserve fund.
The UI Advisory Council recommended, and the Legislature passed, legislation to incrementally increase the wage base over five years. The plan will raise revenue in the short run, while eventually lowering the tax rate for most employers as a result of increased contributions.
A provision was also approved to tighten eligibility standards to collect unemployment benefits. The goal of both measures was to increase the reserves enough to stabilize the fund and sustain a modest recessionary period.
Today’s crisis
However, as we all know by now, the economy has fallen very quickly in recent months, and the modest wage base increase may not be enough to head off the sharp increase in claims for benefits that the Wisconsin Department of Workforce Development is currently experiencing.
Wisconsin is not alone in this problem. Right now, many states are facing funding shortfalls in their UI systems. In the coming weeks, our state may need to borrow funds from the federal government. When the state borrows, it may be subject to federal requirements that specify the timing and amount of state tax increases and benefit reductions which must be followed to avoid further increased federal taxes and penalties.
Short-term solutions include federal “cash flow” loans, which must be repaid by Sept. 30 of the same year to avoid interest charges. This type of bridge loan may be enough to maintain the fund until wage base collections increase later in the year. Depending on the severity of this recession, a longer-term loan may be necessary.
The governor and the legislature will have difficult decisions to make regarding the solvency of the fund and the overall health of our state budget and economy. I believe that the positive and proactive changes made last year will help in weathering the current difficulty.
We in the Legislature must act cautiously with any further changes to the UI system. Whatever course of action we take this year, we must first consider minimizing further tax increases that would only harm businesses and workers’ jobs at a time that is already very difficult for so many.
