Unemployment fund running dry


POSTED: Friday, September 18, 2009

Hawaii's unemployment trust fund, which pays benefits to out-of-a-job workers, is rapidly running out of money, and the shortfall will send unemployment insurance taxes soaring.

By December 2010 the state expects its unemployment trust fund, which is being tapped $31.7 million per month, will run out. The fund, which contained $430 million at the end of 2008, could dip to $118.5 million by year's end.

“;Our unemployment rate has gone up, and we are drawing out at a higher rate than we are paying into it,”; said state Labor Director Darwin Ching.

Hawaii is not alone; at least 14 other states are insolvent, and four more are on their way, Ching said.

The state will borrow about $61 million from the federal government and raise employer taxes to keep the fund going, Ching said. Under state law, the deficit triggers a tax increase for employers due in April. Other payments are due in July and October 2010 and January 2011.

Employers, who are paying an average of $90 per employee a year in unemployment insurance taxes, can expect to pay an average of $1,040 to $1,250 per employee — 1,055 to 1,289 percent increases — depending on how low the state coffers drop.

“;Businesses don't know this is coming,”; said Ben Godsey, president of finance and operations for ProService Hawaii, which handles human resource functions for more than 9,000 client company employees.

Under the current tax schedule, 31 percent of Hawaii employers do not pay unemployment insurance taxes. Six percent of companies pay the maximum tax of $700 per employee.

Under the new schedule, unemployment insurance taxes will range from $450 to $2,040 per employee based on a company's unemployment experience rating, which is determined by a company's longevity and employment track record. A new business now pays $221 per employee in unemployment insurance taxes annually but will pay $1,512 or as much as $1,739 next year.

“;The tax is increasing from a level that's been a fairly low level to being a very significant additional line-item expense,”; said Godsey.

One reason Hawaii businesses face higher unemployment taxes is that the rate has been artificially low. When the state's trust fund swelled to a record $552 million in 2007, the Legislature passed a law that lowered unemployment insurance taxes from an average of $280 per employee to $90 per person in 2008 and 2009. The law, supported by many Hawaii businesses as well as the Chamber of Commerce of Hawaii, included a provision to raise the unemployment insurance tax when the unemployment insurance trust fund balance dipped below an adequate level.

“;It didn't seem like much of a gamble to the business community in 2007, and it was hard to imagine that we would be burning through unemployment at this rate,”; said state Rep. Karl Rhoads (D, Downtown-Chinatown), chairman of the House Labor and Public Employment Committee.

Hawaii's ranking as one of the most generous states for unemployment benefits is another reason that coffers are low. Hawaii's unemployed workers get up to $570 per week and 59 weeks of state and federal benefits.

“;The flip side is that unemployment insurance is what is keeping people's mortgages paid and groceries on the table,”; Rhoads said.

The state and federal government recognize their obligations, said Linda Smith, Gov. Linda Lingle's senior policy adviser.

“;People should not worry that somehow they won't have unemployment insurance,”; she said.

But while benefits will not be cut for Hawaii's unemployed workers, it could mean fewer jobs next year.

“;The irony is that we're raising taxes to pay for unemployment insurance, which will likely reduce hiring,”; Godsey said.

Jim Tollefson, director of the Chamber of Commerce of Hawaii, said the chamber is talking about ways to moderate the impact on businesses. He said they might lobby the Legislature to try to phase in the impact of the tax increase rather than have taxes go up at one time.

Rhoads favors more gradual tax increases. But even if new legislation passed, Rhoads said businesses would be unlikely to get relief before July. Employer taxes would still have to offset the shortfall, he said.

“;If Hawaii borrows (federal) money and can't pay it back within a year, we'll have to pay interest,”; Rhoads said. “;It might not be advantageous if any kind of meaningful relief results in a huge debt.”;

The state expects its fund will be solvent by the second quarter of 2011, Ching said.

“;It would take longer, if we phase in the employer tax increases,”; Rhoads said.



Star-Bulletin reporter Craig Gima contributed to this story.