Minnesota’s unemployment insurance fund expected to enter long-term deficit by year’s end

Meet Minnesota’s other looming fiscal crisis–the one nobody’s talking about publicly yet.

Strained to its limits by the length and depth of the recession, the state’s unemployment insurance (UI) system has just a month’s worth of reserves left. And the program’s administrators say that current projections indicate it will enter permanent deficit by the end of 2009, forcing Minnesota to join the ranks of U.S. states that borrow from the federal government on a continuing basis to meet their UI commitments.

As of last Friday, the Minnesota UI trust fund balance stood at $148.8 million. In May, the system’s total payouts came to $142.2 million; for April, the figure was $172 million. Officials from the Minnesota Department of Employment and Economic Development (DEED) say the fund balance will improve for the short term after second-quarter employer tax receipts are added in July, though they don’t rule out borrowing for cash flow purposes a couple of times in the summer and fall.

The real trouble begins at the end of 2009. "Around the first of December, the fund will go into deficit," says Lee Nelson, the director of legal affairs for the UI trust fund, "and it will not come out under current law.

"[The UI fund] will stay in deficit all the way through 2013 under current [economic] projections and current tax levels."

According to Nelson, the projections peg Minnesota’s year-end fund deficit at $31 million. It will then fluctuate throughout 2010 before rising dramatically in early 2011:

3/31/10: -$485 million

6/30/10: -$420 million

9/30/10: -$395 million

12/31/10: -$547 million

3/31/11: -$1 billion

That last figure worries Nelson. "You just don’t want to get so deep in debt that the system can’t recover," he says. "Once you start to get in that $1 billion range, if payouts stay so high, how do you pay that back? It’s a little like personal finances. You have to have enough revenue to meet your day-to-day expenses and still pay back the loans you’ve taken out."

The UI system is funded entirely by state and federal taxes on employers. It bears no direct relationship to Minnesota’s general fund budget, but it does have implications for the state’s overall business tax load. Any federal loans would eventually have to be paid back through higher receipts from Minnesota employers.

Nelson points out that there are a number of ways Minnesota employer taxes could be modified to make up the shortfall, ranging from across-the-board rate increases to changes in the state’s "experience rating" formula, which charges escalating rates to employers based on the number of claims from their former employees over time. (Seasonal businesses, such as construction, typically have more layoffs in the course of a year, and pay significantly higher rates.)

"Employers with a history of layoffs pay high rates in Minnesota," he says. "But I can tell you those employers don’t pay the full cost of benefits for their workers. You could say they’re being subsidized. In effect, other employers are picking up that tab."

Or Minnesota lawmakers could do nothing, in which case the loan would get repaid through the loss of federal tax credits to the state’s employers. "Federal tax credits under FUTA are worth $1 billion a year to employers in Minnesota," notes Nelson, "and you would keep losing those every year until you paid it back." But this approach would spread the burden indiscriminately, he adds, without regard to the claim levels that individual employers have generated.

Minnesota’s UI system has fallen into recession-related deficit at least twice before. According to Nelson, it amassed a $300-$400 million deficit in 1982-83 and a $440 million deficit in the first quarter of 2003. In the first case, the state’s employers lost federal tax credits, prompting the Legislature to raise rates and levy surcharges. In 2003, legislative action accelerated the payment of state UI taxes.

Despite the deficit, Nelson stresses that benefit reductions are not on the table. At DEED, he says, "There’s been no hint of talk about changing the benefits side of things. That’s not being discussed." Currently, unemployment benefits in Minnesota amount to half of a recipient’s average weekly wages, up to a maximum of $566 a week.

States will catch one break concerning their near-term UI deficits. Rob Pavosevich of the Department of Labor’s Workforce Security program notes that one provision of the federal stimulus bill passed in February exempts states from interest charges on any loan balances through the end of 2010. But it’s after that provision sunsets that Minnesota’s UI deficit is expected to mushroom in size.

Pavosevich notes that a total of nine states borrowed from the federal government during the post-2001 recession. So far, 15 states have begun to borrow in the current recession. And a recent investigative report by the nonprofit news organization ProPublica [previous PIM item] classified Minnesota as one of nearly 20 additional states that might have to borrow soon.

Here’s a DoL listing of the states that have already borrowed, with their outstanding loan balances as of Monday past.