Virginia’s Hidden Deficit: the Unemployment Trust Fund

Virginia Trust Fund Solvency. Graphic credit: “Trust Fund Solvency Report 2018.”

There are many measures for gauging a state’s fiscal condition. The most commonly cited is the condition of its General Fund: Is the state balancing its budget? Digging deeper, one can examine the degree to which a state is funding (and falling short of) its pension obligations. And one can track the extent to which a state is neglecting repairs of  highways, transit systems, buildings, water-sewer facilities, and other public infrastructure, thus building up future maintenance obligations.

Then there’s the Unemployment Insurance Trust Fund. This is the fund, financed through employer payments, from which states draw to pay benefits to Virginians laid off from their jobs. State funds are designed to build up reserves during good times so they can maintain benefits during bad times when payments spike. If states run dry, they can borrow money from the federal government, which they then are required to repay. States are not directly on the hook for unemployment insurance. But restoring solvency to a fund by hiking employer contributions is the functional equivalent of a business tax increase. Lower business contributions make for a better business climate; higher contributions do the opposite.

So, it’s worth asking what kind of shape Virginia’s unemployment insurance reserves are in. And the answer is… not very good. Not the worst — we’re not in the same abysmal condition of California, Ohio or Texas, but we fall below the recommended minimum adequate solvency level. We probably could ride out a weak recession, but are ill prepared for a severe one.

The U.S. Department of Labor publishes an annual “State Unemployment Insurance Trust Fund Solvency Report.” Twenty-nine states, including Virginia, are beneath the recommended solvency standards. The Old Dominion’s relative position compared to other states is shown in the chart above. We’re in the middle of the pack. While we’re not far from the recommended level of solvency, we’re still below it — and we certainly haven’t built up large reserves like Wyoming and Oregon.

(For those tracking the 50 states’ progression toward Boomergeddon, note that several states noted for their fiscal profligacy — Illinois, Connecticut, Kentucky and New Jersey — have among the least adequately financed trust funds.)

As of Jan. 1, 2018, Virginia has $1,148,000,000 in its unemployment insurance trust fund. That may seem like a lot, but the number is meaningless without comparing it to the number of workers it is meant to cover. The chart atop this post gets to the adequacy of that number. Unfortunately, it is far from self explanatory.

The key numbers are associated with the four blue arrows.

The reserve ratio is derived by taking the trust fund balance and dividing by the state’s total wages paid for the year.

The 2017 benefit cost rate is calculated by expressing the level of uninsurance benefits as a percentage of yearly wages. A smaller number — Virginia’s is 0.19% — is good. It reflects Virginia’s low unemployment rate and low unemployment insurance payments.

But low unemployment is expected during periods of economic expansion. The acid test is how well the trust fund holds up in a recession. So, the Labor Department benchmarks against two measures: (1) the highest benefit cost rate ever, and (2) the average of the highest three highest years over the past 20 years.

The Labor Department then calculates the Average High Cost Multiple, which is the Reserve Ratio divided by the Average Benefit Cost rate. “Values greater than one,” states the report, “are considered the minimum level for adequate state solvency going into a recession.”

Virginia’s value is 0.92, meaning (as I understand it) that its trust fund has 92% of the reserves deemed adequate to make it through a recession without resort to extraordinary measures.

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16 responses to “Virginia’s Hidden Deficit: the Unemployment Trust Fund

  1. so this Trust fund – like others we have talked about – because it cannot pay off 100% is “insolvent”, “broke”, “out of money”?

    So here’s a question – if a fund like this cannot pay 100% of “scheduled” benefits .. is that a big political problem?

    How about for something like Medicare Part B ( not Med A)?

    it costs $134 a month and is “going broke”. So should we increase premiums and/or reduce benefits to bring it back to balance?

    If we increase premiums for these entitlements – is that a drag on business?

    so the tradeoffs seems to be :

    1. – don’t increase premiums because it’s a drag on business – and instead reduce unemployment benefits?

    2. – increase premiums.. pay full benefits – and let business figure out how to mitigate those costs just like they’d do with higher electricity costs, or higher costs for machinery or other business expenses?

    what’s the right path forward? higher premiums or less benefits?

    • “So this Trust fund – like others we have talked about – because it cannot pay off 100% is “insolvent”, “broke”, “out of money”?

      As usual, Larry, you are totally mischaracterizing what was said.

      I will say, though, that you partially redeem yourself by accurately describing the trade-offs: Do we charge employers more to fill up the coffers faster? Or do we compensate workers less to slow the drain?

      One thing that North Carolina did was the reduce the length of time that the unemployed could draw benefits, on the theory that many were content not to work. The result of the cutback: unemployment dropped markedly as more people found jobs.

    • Wait, wait — In fact you make this point: “it’s worth asking what kind of shape Virginia’s unemployment insurance reserves are in. And the answer is… not very good. . . . The acid test is how well the trust fund holds up in a recession.” So LG paraphrases, “so this Trust fund . . . because it cannot pay off 100% is “insolvent”, “broke”, “out of money”.” No, you didn’t say that; you said, “[We’re] Not the worst — we’re not in the same abysmal condition of California, Ohio or Texas, but we fall below the recommended minimum adequate solvency level.” But LG’s point was not literal, but this: “if a fund like this cannot pay 100% of “scheduled” benefits .. is that a big political problem?” For that political purpose the Fund could be considered “insolvent”, “broke”, “out of money” — no?

  2. http://leg5.state.va.us/User_db/frmView.aspx?ViewId=5116&s=11

    The link is to the most recent report given to state legislators on the commission that oversees the unemployment insurance program in the state. It shows, as it always does, the changes over time and right now the trust fund is building and the tax rates are shrinking. It actually shows a different solvency calculation that doesn’t exceed 80 percent. When the trust fund goes up that is because the benefits paid are less than the taxes collected, leaving a surplus to save.

    While a 92 percent ratio under the federal calculation might alarm you, Jim, I suspect it too represents an improvement and will hold for a while. Why anybody would want to be at 150 or 250 percent is beyond me, because that means they are taxing their businesses too highly and are sitting on a fat surplus. The upside I guess is that 1) they don’t need to raise taxes on business following a recession and 2) they won’t be going to the feds for a cash flow loan during a recession. But so what if we do?

    I followed this regularly when I worked for the state Chamber of Commerce and kept an eye on it for the shipyard, which paid quite a bit in annual UI taxes given its huge payroll. I do not share your concern. Will nose around in the federal report, however.

    • @Steve – that’s an awesome set of slides! Thank You!

    • Thanks for posting the state report. It contains a lot of useful information. I’m willing to change my opinion in light of new facts.

      You’re right to note that a big surplus could mean that the unemployment insurance “tax” on businesses is too high. We’re not there yet, though. I’d like to see a bigger buffer because I’m worried that the next recession will be a doozy.

      Quoting my favorite financial commentator, John Rubino: Central banks around the world have intervened to manage interest rates for so long and on such a massive scale that no one knows the true cost of credit. “The resulting malinvestment is piling up like underbrush in a forest where fires have been suppressed for too long. And when a fire does break out it will be one for the history books.”

  3. So here’s another question. Is there any nexus between the companies that pay unemployment premiums and who the people are that become unemployed?

    In other words.. for Steve’s example. If the Shipyard payed a crap-load of unemployment insurance premiums.. is that roughly equal to how many at the shipyard end up unemployed and getting benefits?

    Or is it one giant fund that everyone pays into and it don’t matter what companies or industries are drawing out of it?

    say… that the high tech companies are paying unemployment insurance that goes for coal miners thrown out of work?

    softball question alert.

  4. Yep, I read that federal report and go “hooray.” Any state with a score above .90 qualifies for interest free federal loans to pay out benefits if its trust fund is draining in a recession. Why the hell would be want to be substantially higher than that? A bit of a cushion is good but 1.5 or 2.5 is bad management!

    Yes, Larry, the tax RATE applied to an employer is based on your history of layoffs. The tax (state and federal both) is due from every employer on every employee, but for employers with no layoffs in recent years the lowest tax rate applies. There is a good chart in the state report. Yes, all companies pay in because it is a form of insurance.

    This is a pretty solid program. Like workman’s compensation it goes back to the “progressive” era that many people seek to demonize these days, but they do what they are intended to do and the business community seems them as highly positive.

  5. re: ” it goes back to the “progressive” era that many people seek to demonize these days, ”

    YUP, YUP and YUP! “Insurance” is a liberal concept. Real people and real economies don’t need no stinking insurance! It BREEDS “dependency”.

    • “Insurance” is a liberal concept.

      That might be true in in Larry world, but in the real world, insurance arose from the free market before liberal regulations could strangle it to death. In the 19th century, all manner of beneficial societies used insurance as a tool for mutual aid in the absence of government benefits.

      What killed many of these societies was the rise of government-financed welfare entitlements. There is no way of knowing how these mutual aid societies might have evolved in the absence of government intervention, or how different our society would be.

      • so is unemployment insurance a nasty liberal entitlement?

        re: ” Remember, you only qualify if not fired for cause.”

        so why is it a govt responsibility at all?

      • re: ” but in the real world, insurance arose from the free market before liberal regulations could strangle it to death. In the 19th century, all manner of beneficial societies used insurance as a tool for mutual aid in the absence of government benefits.”

        so…. insurance regulations are the antithesis to the free market version of insurance?

        We should get the government out of regulating insurance?

        I guess that’s yet another liberal idea cuz it sure don’t seem to come from the Libertarian types, right? Is that one of the things they’d run on?

  6. “One thing that North Carolina did was the reduce the length of time that the unemployed could draw benefits, on the theory that many were content not to work. The result of the cutback: unemployment dropped markedly as more people found jobs.”

    From time to time some Virginia politician gets the urge to extend the number of weeks or increase the weekly benefit amount. One who got that itch when I was on this issue was Governor Gilmore, of all people. There is no question some recipients don’t do a serious work search until they worry about benefits ending, but there is also no question that these payments help people keep their homes and keep up with necessary bills when a recession makes jobs harder to find. Remember, you only qualify if not fired for cause.

  7. Re: “There is no question some recipients don’t do a serious work search until they worry about benefits ending, but there is also no question that these payments help people keep their homes and keep up with necessary bills when a recession makes jobs harder to find.”

    That’s the tradeoff with any government-funded social-safety-net benefit. It’s unbecoming even for a libertarian to come down so hard on the minimalist notion of a social safety net to preserve life and health and to rescue abandoned elderly and abused kids. The question is where to draw the outside limits of that safety net. Some additions to the net save society (e.g., taxpayers) greater costs, and therefore “pay for themselves.” I submit, the financial and health cost to the individual and economic cost to the locality of large numbers of people losing their homes and ceasing to buy adequate food, let alone make insurance payments, makes unemployment benefits a relatively cost-effective (“pays for itself”) addition to the safety net.

    If you choose, nevertheless, to bring back private insurance as the alternative to “government-financed welfare entitlements,” that would indeed cure the problem of benefits made too generous through populist politics. But what about those in need? Atlas Shrugged notwithstanding, I don’t think we should kid ourselves that individual purchases of private insurance by the middle class, as in 18th century England, provided an adequate social safety net for those with no resources even then, let alone by 21st century US standards. Insurance or “mutual aid” makes it possible to prepare for future risks by amortizing the risk in advance; but that requires foresight and financial discipline, and even that doesn’t take care of people who never have had the disposable income to deal with risks in advance. And then there are some folks who will choose to take any risk to save money. After all, young people live forever in good health, right?

  8. One thing to observe is that unemployment tends to rise when the economy is struggling. That would seem to indicate that there are at least some folks who WOULD work if they could.

    Workman’s Compensation is an interesting concept… involving the private sector and government:

    ” Workers’ compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue their employer for the tort of negligence. The trade-off between assured, limited coverage and lack of recourse outside the worker compensation system is known as “the compensation bargain”. One of the problems that the compensation bargain solved is the problem of employers becoming insolvent as a result of high damage awards. The system of collective liability was created to prevent that, and thus to ensure security of compensation to the workers. Individual immunity is the necessary corollary to collective liability.”

    so.. is this a “liberal” or “Conservative” or “Libertarian”… concept?

  9. Can’t put any of those labels on it. I guess that’s the fundamental point here: the social safety net is a part of every political ideology — except perhaps the most extreme (Ayn Rand) form of libertarian “fend for yourself and no-one else” way of life which is not in fact implemented anywhere in the world today. No matter how much a “conservative” objects to government handouts, he will generally make exception for some minimal level of government life support to prevent starvation, child abuse, etc. You can’t put work requirements and similar recipient conditions on it because it is already minimal, provided to people who are already desperate. As your quote says [source?], Workers Comp is “a form of insurance” because it spreads the risk of total wage loss due to business failures around to all businesses in exchange for capping the risk and cost of worker wage litigation. I suppose the underlying assumption is that without this “insurance,” we’d all have to resort to the courts to enforce each employee’s individual terms of employment if laid off — up to the point of the employer’s bankruptcy after which nobody would get anything — and that’s not a question of political ideology but the common law of contracts.

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