Trust Fund Review Senate Finance Committee David L. Clegg Deputy Chairman & Chief Operating Officer
March 9, 2011
North Carolina Employment Nonfarm Employment January 2007-December 2010 (Seasonally Adjusted, in thousands)
4,300 4,200 4,169,500
4,100 4,000 3,900
National recession began December 2007
3,904,100
3,896,700
3,800 3,700 3,600
National recession ended June 2009 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10
3,500
December 2010 data are preliminary, other 2010 data are revised, while all other data are benchmarked.
North Carolina Situation
As of December 2010
215,665 more individuals unemployed in North Carolina than in December 2007 Lost 272,800 jobs Need to add 4,547 net jobs a month for the next 60 months to reach December 2007 employment levels Total Private Jobs decreased 306,700 (8.8%)
State and Federal Benefits
Benefit Weeks
Regular Unemployment Insurance
Extended Benefits –
(EUC Tier III) – 13 weeks
Extended Unemployment Compensation Tier IV
(EUC Tier II) – 14 weeks
Extended Unemployment Compensation Tier III
(EUC Tier I) – 20 weeks
Extended Unemployment Compensation Tier II
EB – 20 weeks
Extended Unemployment Compensation Tier I
UI – 26 weeks
(EUC Tier IV) – 6 weeks
Individuals may be eligible for up to 99 weeks of benefits
NC UI Benefit Payments January 2010 – December 2010 $5.43 Billion Total Benefits $3.45 Billion Federal Benefits $1.98 Billion in State Benefits $955.2 Million in Tax Collections (Trust Fund and State Reserve)
-9 1
-9 0
Ju l-9 2 Ju l-9 3 Ju l-9 4 Ju l-9 5 Ju l-9 6 Ju l-9 7 Ju l-9 8 Ju l-9 9 Ju l-0 0 Ju l-0 1 Ju l-0 2 Ju l-0 3 Ju l-0 4 Ju l-0 5 Ju l-0 6 Ju l-0 7 Ju l-0 8 Ju l-0 9 Ju l-1 0
Ju l
Ju l
UI Trends - Taxes and Benefits
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
0
Taxes Benefits
Ju l-1 0 N ov -1 1
Ju l-0 9
Ju l-0 8
Ju l-0 7
Ju l-0 6
Ju l-0 5
Ju l-0 4
Ju l-0 3
Ju l-0 2
Ju l-0 1
Ju l-0 0
Ju l-9 9
Ju l-9 8
Ju l-9 7
Ju l-9 6
Ju l-9 5
Ju l-9 4
Ju l-9 3
Ju l-9 2
Ju l-9 1
Ju l-9 0
UI Trends - Trust Fund Balance
3,000,000,000
2,000,000,000
1,000,000,000
0
-1,000,000,000
-2,000,000,000
-3,000,000,000
Purpose of UI Trust Fund •
Provide temporary assistance to those who have lost their jobs through no fault of their own
•
Help stabilize the economy in times of economic downturn.
Title XII of Social Security Act
“…provides for state advances (loans) when a state determines their Unemployment Fund will not have adequate funding to allow for the payment of Unemployment Benefits.”
Current
loan balance: $2,631,866,556
Tax Changes
March 1994: (Senate Bill 151 – Extra Session 1994)
February 1995: (Senate Bill 13 – 1995 Session)
50% tax rate reduction when fund balance equals or exceeds $800m Employers with a credit ratio of 6.4% or more received a tax rate of .01% Also reduced new employer tax rate from 2.25% to 1.8% Employers with a credit ratio of 5% or more received a tax rate of 0%
July 1995: (Senate Bill 180 – 1995 Session)
Imposed a 60% overall tax rate reduction on employers with a credit ratio when the fund ratio was equal to 5.0% or greater
Tax Law Changes
February 1996: (Senate Bill 2 – Extra Session 1996)
Provided a tax moratorium for all credit ratio employers for 1996 Also lowered new employer tax rate from 1.8% to 1.2%
July 1999: (House Bill 275 – 1999 Session)
Training and Reemployment Contribution provided a 20% reduction in employer tax rates while imposing a corresponding 20% contribution for Department of Community College training programs and ESC reemployment services Expanded 0% tax rate to employers with credit ratios of 4% or greater Lowered new employer tax rate from 1.2% to 1.0% Repealed 1-1-2011
Tax Law Changes
July 2003: (HB 1241 – 2003 Session) Imposed a delay in collection of 20% unemployment surtax for one year. 2003 – NC issued $172 million in Tax Anticipation Notes (TAN) to pay Federal Loans. 2004 – NC issued $269 million in TANs to pay additional borrowing. These bonds were repaid in 2005. August 2005: (SB 757 – 2005 Session) Raised trigger for 50% tax reduction from $800 million to 1.95% of gross taxable wages reported to ESC.
Benefits vs. Tax Collections (in thousands) Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Tax Collections $225,540 $150,656 $177,130 $291,593 $327,527 $326,670 $319,337 $367,970 $602,211 $803,674
Benefits $307,804 $398,847 $371,708 $385,790 $419,319 $459,685 $706,494 $1,192,915 $1,196,798 $1,056,019
Trust Fund $1,499,887 $1,383,604 $1,279,586 $1,272,798 $1,267,232 $1,219,353 $ 906,711 $ 368,517 $ <23,433> $<273,232>
UI Trust Fund Report Months
Taxes
Total Benefits
State Reserve
Interest
Balance
JULY 2008
907,454,994
1,032,703,139
171,052,000
20,464,298
414,673,061
JULY 2009
855,942,820
2,321,036,300
153,980,000
10,558,388
(885,882,030)
JULY 2010
786,066,147
2,413,298,782
125,458,000
49,877
(2,387,606,788)
DEC 2010
368,697,000
569,527,670
0
0
(2,588,437,458)
Trust Fund Monetary Flow - Regular Employer Contributions
Trust Fund Interest
Trust Fund Benefits Paid
Trust Fund Monetary Flow - Recession Trust Fund Interest Employer Contributions Federal Loans
Trust Fund
State Reserve Fund
Benefits Paid
Compounding Factors •
Short recovery period between recessions • Recession 2002-04 • Recession 2008-10
•
Increase in the average duration of weeks • Avg. duration 1st Qtr. 2009 – 13.2 weeks • Avg. duration 4th Qtr. 2010 – 18.2 weeks
•
Severity of the recession
Individuals Exhausting Benefits Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Number of Individuals 42,564 74,072 135,370 141,892 115,456 94,240 96,747 100,241 132,019 310,305 283,304
Appeals G.S. 96-15
Claim Adjudicated Appeals Referee - Aggrieved Party may appeal the adjudicator’s decision within 15 days of the date of notification or mailing of conclusion. Commission – Aggrieved Party may appeal the referee’s decision within 10 days of the date of notification or mailing of the decision rendered in the appeals hearing. Court System – Aggrieved Party may appeal the Commission decision to Superior Court within 30 days of notification of Commission decision
Appeals Decisions Rendered
Appeals Referee
Claimant
Employer
Ruled in Favor Ruled in Favor
Second Level Appeals
37,407 49.3%
16,158 54.6%
10,576
Claimant
53,565
Ruled in Favor of Employer
Employer
7,926 80.9%
2,650
Experience Rated Accounts
Annual Computation July 31 Average Tax Rate 2011: 1.8% 2011 Tax Rates
197,691 Experience Rated Employers
59,972 Higher (30%)
13,000 came off New Employer Tax rate
68,812 Lower (35%) 68,907 No Change (35%)
Employer Accounts
197,691 Liable Employers
8,774 Employers with the highest capped tax rate of 5.7%
25,087 Employers with 0% tax rate
0% Tax rate is available to employers who have a credit ratio of 4% or greater
Time Line
February 2009 – First Advance by NC of Federal Loan January 2011 – Interest starts accruing on Federal Debt September 30, 2011 – Interest Payment Due
Current Rate is 4.0869% $100 million in State Reserve to pay interest
November 10, 2011 – Principal Balance due to avoid FUTA credit reduction
Federal Loan Request and Repayment
Governor or designee submits a request to the Secretary of Labor estimating amounts to be borrowed for each month of a consecutive three month period. Secretary of Labor certifies to Secretary of the Treasury the amounts that a State can borrow each month. State can access the amount of funds needed electronically.
Federal Loan Request and Repayment ď Ž
ď Ž
A State may elect to repay loans with any funds available at the end of each day over a specified period. North Carolina sweeps all revenue collected each day to pay benefits before borrowing.
Federal Loan Request and Repayment
Interest rate applicable to a calendar year is the rate of interest paid on balances in the Unemployment Trust Fund (UTF) for the fourth quarter of the prior calendar year.
Interest rate on outstanding balances for 2011 is: 4.0869 percent.
Interest cannot be paid directly or indirectly from funds in a State’s account in the UTF.
A State cannot use grant funds or Reed Act funds to pay interest.
FUTA
Federal payroll tax on employers at 6.2% on a taxable wage base of $7,000 Employers in States that are in compliance with Federal Regulations are given a 5.4% credit on their FUTA A tax credit reduction of .3% annually on States with Federal loan balance outstanding for 2 consecutive Januarys
If NC’s debt is not paid by November 10, 2011, employers effective FUTA tax rate will increase from . 08% to 1.1%. Currently, employers pay $56 per employee. The increase would raise the FUTA tax to $77 per employee.
FUTA Tax Issue
Current Proposals
President Obama proposed in his budget to give State’s a two year moratorium on the interest. Provides a delay in the FUTA tax penalty Also provides for a increase in the taxable wage base while lowering the FUTA tax rate
Senate Bill 386
Senator Durbin proposed a bill similar to Obama’s proposal except:
Would provide a partial forgiveness on the debt principle if States meet certain criteria
Congressional Action •
Extension of the Emergency Unemployment Compensation through December 2011
•
Extension of the interest free borrowing?
•
Eliminate the FUTA credit reduction?
•
Loan forgiveness?
Policy Options Do
Nothing
Adjust
Trust
Existing Statutes
Fund Solvency
Do Nothing
Make interest payments at Federal Rate and continue to borrow from Federal Trust Fund Allow FUTA tax increases to apply to outstanding balance.
.3% increase in FUTA rate annually until loan is settled Cost to employers: $56 to $77 per employee; $83 million first year
By 2015, the rate would be 2.3%, or $161 per employee
ESC Internal Committee Recommendations Incrementally increase Taxable Wage Base
60% - 2012; 70% - 2013; 80% - 2014
Cost to employers:
$10 - $20 million – Year 1 $30 - $40 million – Year 2 $30 - $40 million – Year 3
Require approximately an additional $700 million in collections to replenish the trust fund
ESC Internal Committee Recommendations
Adjust Standard Beginning Rate
Change the Standard Beginning Rate from 1.2% to 2.7%
Eliminate 0% Tax Rate Adjust the tax rates for Debit Ratio Employers
Current Rates are 2.9% - 5.7%
Approximately 17,000 employers have a deficit balance in their ERA
ESC Internal Committee Recommendations
Adjust the standard beginning rate
Currently new employers rate is 1.2% for 2 years
Oklahoma and South Dakota have rates this low
USDOL recommended new employer rate of 2.7%
Generate $38 million a year
ESC Internal Committee Recommendations
Modify Existing Tax Schedules
Have been at the highest tax schedule allowed by statute since tax year 2003 Current Highest rates: Credit Ratio Experience Rate – 2.7% Debit Ratio Experience Rate – 5.7%
Bond Issuance
Existing debt is not a general obligation of the State Bonds would be a general obligation Tax Anticipation Notes (TAN) are not a general obligation but are capped at 50% of the anticipated annual revenue
Lynn R. Holmes Chairman esc.chairman@ncesc.gov 919.733.7546 David L. Clegg Deputy Chairman & Chief Operating Officer david.clegg@ncesc.gov 919.733.4636 P.O. Box 25903 Raleigh, NC 27611-5903