Bankrupt unemployment fund means serious trouble for Ohio

On Friday I received a press release from the Republican members of the Ohio House about the continued high unemployment rates in our state.

It was a standard position statement: we've got ideas and we want the other party to heed them. But there was something very troubling in the last part of the release:

On January 12, 2009 Ohio ran out of money in the Ohio Unemployment Compensation Trust Fund, which provides cash benefits for unemployed Ohioans and is funded by employer payroll taxes. The state began borrowing from the federal government to continue making payments to unemployed Ohioans. To date, Ohio has borrowed approximately $2 billion from the federal government, which must be paid back in the future. Debt projections of this nature are expected to reach $3 billion by the end of 2010.

I remember hearing about the fund running out of money last year, but I didn't realize that it still had no money and was continuing to borrow to cover the expenses.

And I certainly don't remember any news articles about this growing debt.

So I did some research and came across a guest column issued by State Senator Karen Gillmor on September 17, 2009, wherein she details the problem with the unemployment compensation fund:

Lawmakers established the Unemployment Compensation Advisory Council to recommend legislation that ensures a sound and legal unemployment compensation program for Ohio. I was honored to be appointed to this Council earlier this year.

You can imagine my surprise when I learned at my very first meeting that a July 2008 report prepared by Dr. Wayne Vroman of The Urban Institute, which makes a series of recommendations to improve the fund’s solvency, went virtually unheeded. That’s right – the Council knew the fund was in trouble, sought advice on how to head off trouble, and then failed to implement a single recommendation made by the expert they hired.

As a result, the fund became insolvent early this year for the first time since the 1980s. Beginning January 12, 2009, the State of Ohio began borrowing from the Federal government to continue making unemployment benefit payments, a sum totaling nearly $1.2 billion to date.

In April, State Auditor Mary Taylor cautioned against uncontrolled spending given our precarious economic condition. According to her projections, the state could be facing a budget shortfall of nearly $8 billion by 2013 – a problem further complicated by the state of the unemployment compensation fund.

Fortunately, the Federal stimulus bill delayed interest payments on the monies borrowed for our unemployment fund. But Ohio must begin repaying the estimated $4 billion in January 2011, when the Federal government will resume charging interest. Speculation is that the unemployment situation may not improve significantly until 2014.

So we've borrowed billions from the feds, will have to repay the money - and begin paying interest on the debt in January.

The unemployment compensation fund 'taxes' employers and puts the money collected into a separate account to pay out benefits when individuals are unemployed. The problem is that Ohio is paying out roughly $3 billion a year in benefits, but only collecting around $1 billion in employer contributions (2009 figures).

This isn't the first time Ohio has borrowed from the federal government to cover a shortage in this fund. We did so in the 1980s and it took eight years to repay the interest and principle. This time around, however, Propublica reports:

Ohio has been operating its trust fund at dangerously low levels for years, entering the recession with less than two months of reserves. The state was one of the first to begin borrowing at the beginning of 2009, and employers face a small tax increase from $266 to $270 per employee, on average, for 2010.

And with the economy the way it is, the state cannot just triple the rates on the employers who are actually still in the state. That's a sure way to push them elsewhere and discourage other companies from locating here.

Any increase in employer costs will have negative repercussions for the state's economy. Employers cannot just pass along those costs to consumers who have already cut back on spending, meaning they must be absorbed by the company (lowering any potential profits) or offset by cuts elsewhere in the company - perhaps laying off others, who then begin to collect what isn't there, thus exacerbating the problem.

So while Ohio employers did see a rate increase for 2010, there was no change in benefits distributed to out-of-work individuals.

Historically, states have relied upon boom times to build up their funds with enough money to cover the busts. Ohio's economy, however, hasn't seen the same 'boom' as other states and our 'busts' seem to last longer, too.

The state really can't do anything about unemployment as government doesn't create jobs. But state legislatures can implement business-friendly laws and tax rates that allow companies to grow. The recent phased-in tax changes were certainly a step in the right direction - until the legislature decided to halt this year's phase of cuts. You see, the politicians decided that government needed the money more than we did, which is always a problem.

In the long term, Ohio faces the same situation as the federal government - you can only borrow for so long before the bill comes due. And when it does, someone - meaning you and me - will have to pay.