The Wreck of Recession

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Unemployment Insurance
– The Wreck of Recession
Who the heck is “Sir Charge” and why
does he want money from us?

We didn’t have a layoff!



Nobody in their right mind sits around worrying about their tonsils.  Then, a series of bad sore throats and a doctor is suggesting they come out.  In recovery from the operation it becomes obvious - the cure hurts far worse than the disease.


So it is with Unemployment Insurance.   Most small business owners don’t understand it and most large business CEOs don’t even know they have it.  Then, the worst recession in two lifetime’s hits and nearly every business in the state faces a surcharge and feels like they’ve been grabbed by the throat.


This special report will directly answer the following questions or (following long-held traditions in public policy debates, won’t really answer but will point out numerous options . . . none of which make anyone happy):


·        How did this happen?

·        Who thought up this surcharge? 

·        How long will it last?

·        Whose fault is this?

·        Why do businesses that have NEVER had a claim have to pay the surcharge?

·        How does the state fix a deficit UI trust fund?

·        What changes should be made in how this system is run?


The Chamber will not answer one of the most emotional questions that has been asked concerning the UI fund, which is usually phrased something like “Who can we pound?”


Part One: The Mess.


There was no way for anyone to have seen this recession in advance.  Even if someone could see that there was some level of peril, the magnitude of this recession is simply staggering.  There is one fact that shows this clearly.  Below you will find how much benefits have increased because of the recession.


            Average annual benefits paid for 2004 to 2008 $24.1 million

            Benefits to be paid for 2009                                          $64.9 million (est.)


Looking at the number of claims being paid and the amount being paid for them is also instructive.


            Second week of Aug. 2008 – 1,949 claimants receiving $457,591 total benefits

            Second week of Aug. 2009 – 5,624 claimants receiving $1,523,349 total benefits


Past Reforms.


In 2005, the Chamber led an effort to fix a declining trust fund balance by passing reforms that:

  • Increased the wage base over time from $7,000 to $10,000.  It is important to remember that UI rates and any surcharges are only paid on the wage base of an employee, not their entire wages.
  • Increased the maximum rate to 8.5%.
  • Preserved the ability for businesses to earn a rate of “zero” by having sufficient reserves.  South Dakota is one of six states to allow a rate of zero.
  • Changed key ratios so all businesses with negative account balances would pay higher rates.
  • Chose a target trust fund balance of $47 million – a level that was not reached.
  • Implemented interest charges for businesses with long-term negative account balances.  Interest is owed after a business has a negative balance for 24 months.  It was implemented for the first time in 2009 and will collect $408,010.08 from 579 businesses.
  • Change the surcharge system from one that triggered at the end of a year and remained in place for an entire year, to one that could be implemented at the end of any quarter and would be removed at the end of any quarter that the fund had a predetermined balance ($16 million).  Okay, it seemed like a good idea at the time.

These reforms improved the UI income and the trust fund was growing when the recession hit.  It’s like finally fixing a leak in the roof only to have a hailstorm beat you senseless and destroy the entire roof while you’re climbing down the ladder.


Where did the surcharge come from?


There has been a surcharge on the books for a very long time.  The last time it was actually assessed was in 1982, which was the last recession that really hit South Dakota.  There have been several recessions since then but they didn’t have as much of an impact on the South Dakota economy.


Surcharges are assessed anytime the trust fund balance goes below $11 million and remain in place until the balance grows to $16 million.  Just how far below the trigger balance of $11 million determines the amount of the surcharge.  Given the fact that at the end of 2009 the balance will be a negative $7.8 million, the surcharge is not only triggered but will begin at the maximum rate of 1.5% (of the wage base), which is what everyone (and we mean everyone) will pay.


How long does “Sir Charge” plan to be around?


There is $11.7 million available from the federal government that could affect the answer to this question.   Assuming that the state DOES NOT take the federal money or make changes in the surcharge law, it will last until the third quarter of 2010.  The problem is that projections suggest the fund could dip below the trigger point early in 2011 and the surcharge could return at that point.  If it returns then it will be at a lower rate.  Think of it as “Sir Charge” in a smaller suit of armor with a shorter sword. 


How the Federal Government has offered to “help”.


In order to receive the funds from the federal government, there are changes in the benefits that would be required.  It should surprise no one that the changes required will increase benefits.  These changes are explained near the end of the report for the true policy wonks among readers – all three of them.


Why do businesses that have had no claims have to pay the surcharge?


The surcharge is a bit like a tetanus shot, delivered using a posterior application.  It is the result of some accident that happened after a long period of normal activity during which there was absolutely no apparent risk.  Kids running hard don’t need tetanus shots until they find an old railroad spike with their bare feet.  While the surcharge isn’t pleasant, it does happen as a result of running the UI system with some easily ignored risks that did benefit all businesses.  What benefits? 


The UI system in South Dakota has been run as a “low-wage base; low rate (including zero) and low balance” system.  A conservative system that places as low an impact on employers as possible is simply running a risk that recessions will not be severe.  When a severe recession hits (like a spike in the foot), it is a surcharge that becomes the fix. Since all businesses have benefited from low UI rates, this version of the tetanus shot is given to everyone who played in the game. 


States that aren’t experiencing a surcharge have a “wage base” that exceeds $20,000 and require businesses to pay into the system every year.  These are changes explored below and ones that should be debated by the 2011 legislative session.  Before returning to long-term questions, the state must first address the hemorrhaging of the current system. 


Does everyone pay $150 per employee right off the bat?


No!  Much has been made of the maximum for a surcharge which is $150/employee, as long as that employee makes more than $10,000 a year.  Businesses with part-time workers will not pay the full $150 right away and might not pay it next year either. 


As a hypothetical example let’s take a business that uses mostly part-time employees.  Veggie Wash, Inc. pays their kumquat cleaners $9/hr for 20 hours a week (no one on earth could clean kumquats for more than 5 hours at time).   The annual pay for kumquat cleaners is $9,360 or $2,340 each quarter.  Since this annual salary is less than the wage base, the surcharge will affect a portion of these wages.  Veggie Wash will pay a surcharge of 1.5% of the wages paid in the fourth quarter in 2009 (a payment due in late January 2010).  The surcharge paid for each kumquat cleaner will be $35.10, not the entire $150.  Assuming that the supervisor of the kumquat cleaners makes more than $12,700 a year, his wage base would be completed in the third quarter so there will be no surcharge until first quarter next year.


All businesses will be paying 1.5% of all wages paid starting in the first quarter of 2010 and will pay that surcharge until the employee’s wages exceed the wage base, which will be $10,000 (1.5% x $10k = $150).  These payments will be due at the end of April.



Part Two – “Clean Up in Aisle One.”  How to Fix a Deficit Trust Fund.


The surcharge will bring more revenue to the trust fund than premiums will during the next year.  This is because the businesses that have earned a “zero rate” will be paying the surcharge, as will hundreds of businesses with UI rates below the 1.5% level.  Without any other changes, the surcharge will continue to apply through June 30, 2010, with the last payment due to the Department of Labor on July 30, 2010.


Unpleasant note:  If benefits continue to be above normal levels, it is possible that the balance will fall below $11 million in early 2011 and a surcharge will be assessed again.  This surcharge would be less than the full 1.5% being assessed today.


Rich Relatives:  My Uncle Sam - His Money and His Rules.


There is money available from the federal government that could increase the balance of the fund enough to avoid the second round of surcharge assessments.  South Dakota could get $11.7 million, if the legislature adopts several changes to the benefits offered through the UI system (all of which cost more money).


South Dakota would have to adopt TWO of the following benefit expansions:


• Part-time Workers**

      Already pay part-time

• Dependents Allowance

• Quit for Compelling Family Reasons

• Benefits for Training


**Since the state already offers proportional benefits for workers with a history of working part-time, the state would only have to adopt ONE of these:


• Dependents Allowance

• Quit for Compelling Family Reasons

• Benefits for Training


Here is a brief explanation of these options and their projected costs.  Please note the word “brief” is a policy wonk’s code for “You won’t understand any more after reading it than you know now, but you’ll learn some key terms to use at coffee tomorrow.”


Reminder:  UI benefits are paid when someone loses their job through no fault of their own.  The benefits below will not be available to people who quit a job or who have been dismissed for good cause.


•         Dependents Allowance – Benefits under the current UI system are designed to replace a portion of an individual’s income.  The payments remain the same regardless of the number of dependents at home.  Creating a dependents allowance would increase benefits according to the household situation.  The payments are projected to be $15/week/dependent, which means spouse, child and/or parents in house.

      Projected Cost: $2.5 million/year


•         Compelling Family Reasons – UI currently does not pay benefits for people who leave a job voluntarily or quit on their own accord.  This provision would allow benefits for someone who is trying to return to the workplace after attending to a family health crisis, if they quit for that reason.  Technically, benefits would not be paid while the person was engaged in providing care because they are not available to return to work.  Not to be cynical, but the Chamber figures that interpretation will last about an hour and an half.


This option must also include paying benefits to people who quit a job to follow a relocating spouse.  When one partner in a marriage takes that dream job on the west coast it will be the obligation of the South Dakota UI system to pay benefits to the other partner when they quit to join the first partner (this could be a complete jolt to the first partner if the new job was planned as an escape . . . but that’s beyond the scope of this report). 

Projected Cost: $1.8+ million/year

Note – South Dakota does provide a portion of this benefit by allowing benefits to be paid to people who quit a job to escape domestic violence. 


•         Training Period – Under current law, UI benefits are designed to last 26 weeks.  During recessions, the federal government will often pay for extended benefits and this recession is no exception.  The federal government is paying an additional 20 weeks and has increased that by 13 more. 


To receive the federal money, South Dakota could offer (at state expense) a second 26 weeks of benefits if a person enrolls in approved training programs.  The state could determine the qualified programs to assure people seeking retraining would be preparing for jobs that are experiencing a workforce shortage.  It would not be possible for someone to quit a job and receive the training money to become a potholder weaver . . . unless some potholder weaving factory was having trouble finding workers, which would also seem to indicate that every four- year-old learning a new hobby had left the state. 

Projected Cost: $0.8 million/year


The Unemployment Insurance Advisory Board has recommended that the state take the money for the trust fund and adopt the benefit expansion that allows for a training option.  The Council looks forward to an end to the recession and a return to a shortage of skilled workers.  When that happens, this change can be seen as a logical extension of the UI system because it would help people laid off from one circumstance to get training and hopefully avoid future layoffs.


Summary:  You have just read the two leading options to address the crisis in the short term.  To review, it is a choice between having the surcharge extended or taking federal money and adopting expanded benefits that will add costs to the system for years.  To some it will seem like a choice between getting kicked in the fanny or hit in the mouth.  There is a possibility that the state could take the federal money and then repeal the expanded benefits when the amount of the extra benefits equaled the federal funds.  History will show that benefits are hard to repeal and the State Chamber of Commerce, which has image problems similar to Scrooge as it is, will be slow to advocate that strategy.



Part Three:  The Long Term Future - Spill Guards vs. More Mops.


For those businesses that survive the recession along with various surcharge payments for the UI system, the next task will be to decide how to manage the UI system in the future.  The past policies of having a low wage base, modest trust fund balance and moderate rates created the system vulnerable to a shock from extremely bad recessions. 


The alternative will be to adopt a higher wage base or perhaps eliminate the option for businesses to earn a “zero” rate.  Here are some facts to prepare for that phase of the discussion which will be part of the 2011 session.  (Watch all the legislative candidates mumble their way around this one next year.)


Wage Base:  South Dakota has a much lower wage base than the surrounding states which results in payments to the UI system that are much smaller as well.  Here are the comparative wage bases that are used in the region:


•         South Dakota            $  9,500

•         Wyoming                      $21,500

•         North Dakota               $23,700

•         Nebraska                     $  9,000

•         Montana                       $25,100

•         Minnesota                    $26,000

•         Iowa                            $23,700


South Dakota will have a wage base of $10,000 in 2010 but has not planned further increases.  The strategy that was adopted in the reforms of 2006 included a desire by the business community to avoid too many automatic increases in the wage base.  It will be time to decide how high the wage base should be during the next two sessions.


Rates:  As noted (over and over), South Dakota is one of only six states that allow a UI rate of “zero”.  Below you will find the minimum and maximum rates for the surrounding states.  It should be noted that there are two reasons to confine comparisons to surrounding states.  First, these are the numbers the Department of Labor uses and second, if a business is going to run, it is a good calculation they’ll end up in one of these states.


                                    Min     Max

•         South Dakota            0.0%     8.5%

•         Wyoming                      0.27%   9.03%

•         North Dakota               0.20%   9.86%

•         Nebraska                     0.24%   5.4%

•         Montana                       0.13%   6.5%

•         Minnesota                    0.56% 10.7%

•         Iowa                            0.00%    8.0%


The “Non-Zero” Option:   By now readers should be aware that South Dakota is one of six states that allows businesses with sufficient reserves to discontinue making payments to their accounts.  This is often called the rate of “zero”.  If the reader is unaware of this fact, then you have begun reading this report in the middle, which is not advised.  It barely makes sense when read in order; taken out-of-order could cause damage to one’s ability to laugh. 


Many states require some level of payment each year.  Using 5th grade math (nope, no one here is smarter than a 5th grader, just smart enough to avoid being on TV to prove it), the chart below takes the wage base and the minimum rate to show the lowest annual payment in each of the surrounding states.


•         South Dakota            0.0%     10.0k            $  0

•         Wyoming                      0.27%   21.5k              58

•         North Dakota               0.20%   23.7k               47

•         Nebraska                     0.24%     9.0k              22**

•         Montana                       0.13%   25.0k               33

•         Minnesota                    0.56%   26.0k             143

•         Iowa                            0.00%    23.7k                0


**Seeing that Iowa is one of the other six states that allow a zero payment may cause some sort of political crisis in South Dakota.  The South Dakota Chamber of Commerce and Industry is only responsible for starting fights, the organization has a policy against gambling or speculating on outcomes.


More on the “Zero” Option:  There isn’t anyone still reading this who wants to know more about this “zero thing” but it may be handy to grasp its impact on the system.  Approximately a third (8,000 businesses of 24,000) have enough in their accounts to have earned a zero rate.  To express this in employee numbers, there were 370,247 covered workers as of February this year.  Of those workers, 101,102 or 27% worked for “zero-rated employers”.


One of the long-term options that could put more money into the UI trust fund and still allow business to earn a zero rate would be to increase the reserve requirements.  This was part of the reform package adopted in 2006 and will undoubtedly be part of future discussions. 


Conclusion:  It has been said “When going through hell the best thing you can do is to keep going.”  The UI surcharge is now a reality and will be having an impact on South Dakota businesses starting in January when the first payments are due, and extending through much of 2010. It could well be brought back in 2011 also.  There is federal money that could help avoid a continuation of the surcharge but taking that money could be a bit expensive as it requires an expansion of benefits.


To avoid running the risk of another surcharge, the South Dakota UI system will have to change and will have to require higher payments.  This could be accomplished by increasing the wage base, increasing the maximum rate, or by eliminating the option of earning a zero rate and requiring businesses to make some payment to the trust fund each year regardless of claim history.  It is hard to imagine that businesses flinching at a short-term surcharge will warmly embrace an annual fee.


Once again, there is very little in this issue that could render readers any sense of happiness.  These issues are complicated and boring – a horrid combination.  Meaningful solutions to these issues require endless hours of study, a grasp of the facts and of the pressures that public opinion puts on those responsible for setting policy.  This is the work of the South Dakota Chamber of Commerce and Industry – it is the value of your membership – it benefits all businesses.  Thank you for making it possible.



David Owen, President
South Dakota Chamber of Commerce and Industry
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