Vermont lawmakers may have nearly balanced the budget this year – even in the face of a $154 million deficit – but they haven’t yet resolved an equally daunting fiscal problem: the bankrupt Unemployment Insurance Trust Fund.
The unemployment fund went broke in January, and if lawmakers and the Douglas administration don’t tackle this politically prickly issue before the end of the legislative session, the state will have to borrow roughly $223 million to cover benefits for unemployed workers this year and next.
The federal government is lending Vermont $4.1 million a week so that the state can meet its obligation to workers who have lost their jobs.
Projections from the Vermont Department of Labor show that the state could have to borrow as much as $404 million by 2014 if the issue isn’t addressed in a timely way.
Though the federal government has allowed states to borrow interest-free this year, payments on the interest, which would start accruing next year at a rate of 5.4 percent, according to figures from the governor’s office, would come out of the General Fund. The cost in fiscal year 2011? Six million dollars; and possibly as much as $12 million the following year, if the state borrows as much as is anticipated.
Vermont can start to climb out of bankruptcy in four ways: by raising taxes, cutting benefits, borrowing more money or waiting out the recession.
Patricia Moulton Powden, commissioner of the Labor Department, says waiting for the fund to correct itself isn’t really an option. If the Legislature does nothing, she says, the fund will not come back into balance until 2025, and it would not reach sustainable levels until 2040.
Read the Department of Labor’s proposal for the unemployment fund.
Summary of S.290, Sen. Vince Illuzzi’s proposal
Under state statute, the fund is supposed to have a $300 million cushion to weather recessionary conditions. The worry is that if the state waits that long for the fund to come back, it won’t have the resources to offer benefits in the next recession.
“Some of the rumbling I’ve heard in the Statehouse is there are so many states borrowing, the feds are going to come up with something,” Powden said. “Well, they’re staring their own deficit in the face.”
The federal unemployment loans to states, Powden said, are expected to total $90 billion this year. So far, 35 states have had to borrow from the federal government; five more are expected to bankrupt their funds before the end of the year.
The current recession was the tipping point for the Vermont unemployment fund. Statehouse observers, lobbyists and lawmakers say the situation was inevitable, given this basic fact: Unemployment taxes on businesses (with the exception of a very slight increase last year) have not gone up since 1983 when Richard Snelling was governor (the first time around) and Sen. Vince Illuzzi, R-Essex-Orleans, now a veteran of the Legislature, was newly elected. Meanwhile, benefits increased modestly in the last recession when lawmakers tied compensation to the cost-of-living allowance and average wages.
“I used to call it the sleeper issue that’s going to come and bite us in the butt,” Powden said. “I don’t call it the sleeper issue anymore because it’s biting us in the butt as we speak.”
Demand for benefits continues to outpace employer contributions by a nearly 3 to 1 margin: This year, the state anticipates paying out $190 million in weekly compensation for unemployed workers, while businesses are expected to contribute about $68 million, according to department figures.
Demand for benefits continues to outpace employer contributions by a nearly 3 to 1 margin: This year, the state anticipates paying out $190 million in weekly compensation for unemployed workers, while businesses are expected to contribute about $68 million, according to department figures. In March, the unemployment rate in Vermont was 6.5 percent; the national rate was 9.7 percent.
Last year, the Legislature made two slight changes that Powden called “Bandaids on an amputation.” Lawmakers raised taxes on businesses very slightly and froze unemployment benefits at $425 a week. They also commissioned a summer study, which didn’t yield a report because the group of senators and representatives couldn’t come to agreement.
Legislative interest in reforming the unemployment fund this year – given the unappetizing options, i.e. raising taxes and cutting benefits – has been muted so far.
An attempt to remedy the situation in the Senate has been stuck in committee. Sen. Vince Illuzzi’s bill, S.290, which would balance the unemployment fund budget by 2014, has been languishing since it was passed out of the Senate Committee on Economic Development on Feb. 19.
“Everybody’s yawning when they hear about unemployment insurance,” Illuzzi said. “But somebody’s going to get $6 million more in cuts.”
Last week, Illuzzi, who represents the Northeast Kingdom, tried to dislodge his bill from the bottom of the Senate’s pile of priority agenda items. He brought together an unusual coalition of business leaders from just about every sector of the state’s economy to drum up support for S.290, which significantly raises employer contributions to the fund.
There is, as Illuzzi likes to say, something for everyone to hate in the bill. It raises taxes on businesses, introduces an unprecedented and controversial payroll tax on workers, and cuts benefits for laid off workers through a series of new restrictions and eligibility requirements.
Representatives from the Vermont Chamber of Commerce, Vermont Businesses for Social Responsibility, the Vermont Retail Association, the Vermont Grocers Association and the Associated Industries of Vermont rallied in support of S.290, even though the bill would more than double their members’ unemployment taxes.
In all, businesses would pay an additional $200 million to the fund by the end of 2014. The taxes would be phased in over a four-year period.
In all, businesses would pay an additional $200 million to the fund by the end of 2014. The taxes would be phased in over a four-year period.
Companies pay a small annual percentage on what is called the “taxable wage base,” or a portion of an employee’s earnings. Right now, that base is $10,000. In 2013, the base would go up to $16,000. In addition, “reimbursable employers,” that is nonprofits, such as hospitals and colleges, which don’t contribute to the fund on an annual basis but instead reimburse the fund when employees are laid off, would pay a 1 percent fee.
Why would businesses agree to the unthinkable? Call it enlightened self-interest. Under federal law, companies in Vermont must pay a higher federal tax as long as the state is borrowing money for its unemployment fund. The tax increase comes in the form of lost credits — a 0.3 percent penalty every year until the state fund reaches solvency or the total percentage payout reaches 6.2 percent, whichever comes first. They say the federal penalties would cost hundreds of millions of dollars more than the state-imposed tax increases.
Bill Driscoll, executive director of the Associated Industries of Vermont, compared the bill to a trip to the dentist. “Do you want to do this? Well, no, not really, but if you don’t it’s going to get worse,” Driscoll said. “It’s sort of an ironic question when people ask us if we like the bill. It’s more like reluctant acknowledgement that it’s what needs to be done.”
Advocates and some lawmakers have found plenty to loathe here. While businesses and the Douglas administration call the bill “a balanced approach,” its detractors say it’s unfair for the state’s workers to bear the brunt of restoring the fund, which they say is in trouble in the first place because the state has neglected for 27 years to ask employers to contribute enough to keep the fund solvent.
Rep. Dave Sharpe, who has taken the lead on the issue for the Ways and Means Committee, is adamantly opposed to cuts to benefits for workers, and he said the state should move slowly on increasing taxes on businesses. He advocates for more borrowing until the economy recovers.
“I think the conversation on unemployment insurance is all about balance,” Sharpe said. “And what different people consider what balance is. Businesses have had a free ride on unemployment insurance for 25 years, and now they’re willing to step up to the plate and pay into the fund provided that it’s balanced.
“What they (the administration, business leaders and Illuzzi) mean by balanced is that there’s an equal amount of cuts on unemployed workers,” Sharpe said.
The new payroll tax, which would cost workers about 2 cents for every $100 earned ($80 a year for someone earning $40,000), would raise about $100 million over a four-year period and would sunset once the fund is balanced in 2014, according to Illuzzi.
Changes to benefits for unemployed workers would start immediately and continue indefinitely. Powden estimates a one-week waiting period for benefits, cuts to part-time income for unemployed workers and other changes will save the state $100 million over four years.
Changes to benefits for unemployed workers would start immediately and continue indefinitely. Powden estimates a one-week waiting period for benefits, cuts to part-time income for unemployed workers and other changes will save the state $100 million over four years.
Sharpe said these significant cuts and taxes on workers could send the economy into a tailspin. “It’s the wrong time to take a $200 million out of the economy,” Sharpe said. “No economist would say this is a smart thing to do, to take $100 million out of unemployed workers pockets that would have the effect of slowing the recovery, not helping the recovery.”
Advocates refer to the eligibility restrictions as cuts, and they say it is patently unfair for the state to ask laid-off workers to make ongoing sacrifices, while tax increases for employers are phased in gradually and then sunset once the unemployment fund is restored in 2014 under Illuzzi’s plan.
Christopher Curtis, a staff attorney for Vermont Legal Aid, said S.290 and the administration’s proposals to balance the fund on the backs of workers are unjust. “The question is, why are employers being treated differently than laid-off workers and their families?” Curtis said.
Curtis also said that S.290 and a similar proposal from the administration will hurt the fragile economic recovery. Every dollar that goes to the unemployed, he argues, goes directly into the economy toward rent, food and necessities.
“We all want to get this resolved,” Shumlin said. “We’re better off focusing on the prize – not talking about our differences.”
Though Gov. Jim Douglas, Speaker of the House Shap Smith and Senate President Peter Shumlin met to discuss the bankrupt fund last Friday, and again today, they appear to be far apart on the key issues. All three agree something has to be done, and they each object to the payroll tax. Shumlin won’t discuss details for fear of jeopardizing the talks; Douglas is adamant that unemployed workers must make sacrifices, too; Smith objects to benefit cuts.
“We all want to get this resolved,” Shumlin said. “We’re better off focusing on the prize – not talking about our differences.”
Douglas said today’s meeting was productive, but didn’t elaborate on the details.
David Corriell, the governor’s press secretary, said: “Everybody understands this is a problem that can’t wait another year. The governor thought that was a significant part of that meeting that putting this off another year creates another problem. I think he’s been concerned that there’s been maybe a sentiment in the House, particularly that this might be able to wait another year. Each year we put this problem off, the deeper the cuts to benefits or the increases to taxes on employers or a combination of both will have to be. I hope that’s something that all parties understand.”
Betsy Bishop, executive director of the Vermont Chamber of Commerce, expressed frustration with the continued stalemate.
“Basically, they don’t want to do the payroll tax, they don’t want to do reductions in benefits, and I think they’re concerned about raising taxes on businesses as well,” Bishop said. “That’s the whole point of the press conference last week — this is why you’re elected to make these difficult decisions.”
Impacts on workers
Business leaders, for the most part, are insistent that workers need to share the pain. They talked about how important “balance” is for any legislation addressing unemployment reform.
Bishop said that if lawmakers decide they couldn’t stomach reductions in benefits — that that could be a deal breaker for the business community.
“Our position is that the bill, S.290, as it came out of Sen. Illuzzi’s committee, is a total compromise,” Bishop said. “The whole bill represents a real balanced approach to fixing a very difficult problem. However, if pieces start to get pulled off of it, and there is no total fix … We would have to come back and look at that. You can’t just change one piece of a whole compromise and expect any of the groups that agreed to that to sort of adhere to that.”
As it stands, Illuzzi’s bill would significantly change unemployed workers’ benefits. S.290 would:
* Require laid off employees to wait one week before they begin receiving benefits.
* Freeze the benefit rate at $425 per week.
* Change the weekly benefit rate to reflect an entire year’s wages; currently, benefits are based on an employee’s average wage over two quarters. This would reduce the benefit payments to seasonal employees, such as construction workers, who are typically laid off in the winter.
* Immediately disqualify a person fired for misconduct (there is currently a delay in place) and increase the penalty for employees who are fired for gross misconduct.
* A 15 percent reduction in the amount of part-time wages laid-off workers can earn without incurring a loss in benefits.
* Remove the option of laid-off workers to collect unemployment benefits and severance pay simultaneously.
Nationwide, few other states have adopted such a wide array of benefit restrictions and cuts in the current recession, according to information from the National Association of State Workforce Agencies.
Smith said he doesn’t want Vermont to lead the nation in benefit cuts.
Benefit increases, for example, have been frozen in only four states. And of the eight states in which solvency legislation has been recently enacted, only three have restricted benefits, according to the association: New Hampshire, which enacted a waiting period; Arkansas, which put an eligibility limit on workers who have been charged with misconduct; and West Virginia which restricts benefit eligibility in minor instances of work stoppages. Thirty-nine states require claimants to wait a week before receiving benefits.
Smith said he doesn’t want Vermont to lead the nation in benefit cuts.
“I think it’s really going to come down to what other states are doing,” Smith said. “I’m not interested in being at the forefront of states that are cutting benefits to workers. That’s really not a place where I want to be.”
The new benefit eligibility requirements, in Sharpe’s view, are really about cuts to workers. The administration proposed lowering the weekly benefit to $400 per week last year and this year, but the state would, in so doing, run afoul of federal law, which requires that states show a maintenance of effort.
“This is a way to accomplish that without accomplishing it,” Sharpe said. “It would hurt virtually every recipient of unemployment benefits. Otherwise, how could they raise so much money?”
The four-quarter proposal, in particular, would have a significant impact on seasonal workers who are employed by the construction, ski, tourism and agricultural industries, Sharpe said, because it would include periods when they earn less or are unemployed altogether and lower their benefit amount.
“There just aren’t that many unemployed seasonal workers that hang around for six months on unemployment,” Sharpe said. “People don’t like to sit around and collect from the government and in fact, most Vermonters don’t. We’re No. 1 in the country in going back to work, so most seasonal workers go back to work. You can only raise a whole lot of money from this so-called ‘correction to the seasonal worker problem’ by proposing a solution that hits all workers and that’s what the four quarter proposal does.”
The payroll tax
Powden said three states have adopted a payroll tax to help shore up their beleaguered unemployment funds: New Jersey, Pennsylvania and Alaska.
Though Douglas, Smith and Shumlin have not yet made public the specifics of their negotiations, all three have expressed reservations about a 2-cent payroll tax.
Douglas sees it as a slippery slope: If the state opens up that taxing mechanism, it could lead to more taxation down the road for health care and family leave act subsidies.
“The payroll tax is another imposition on the budgets of struggling families,” Douglas said. “It could easily be raised in challenging budgetary times, and I have no doubt that there would be rate creep.”
Smith came to the same conclusion, but from a different vantage point.
“I thought imposing a payroll tax really created a huge shift in the burden from employers to employees because the payroll tax is made up entirely by employees,” Smith said. “And all the benefit reductions are employees. It didn’t seem like the split really was fair given the fact that a lot of the problem has been caused by the fact that we have not raised the taxable wage base since 1983.”
