Solvency Recommendations for Ohio

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Abstract

This report examines the funding of unemployment insurance (UI) in Ohio. It proposes seven recommendations to improve program solvency, both in the short run and in the long run. The two main recommendations to improve short-run solvency are to: 1) implement a substantial increase in the taxable wage base and 2) institute a temporary freeze in weekly benefits, both recommendations to be effective in 2009. Indexation of the taxable wage base is a principal recommendation to improve solvency in the long-run.

Introduction

In the period since December 31, 2000 the balance in Ohio’s unemployment insurance (UI) trust fund has decreased by roughly $2.0 billion. At the end of December 2007 the balance stood at $445 million or 20 percent of its level at the end of 2000. By March 2008 the balance had reached $135 million, and to maintain benefit payments later this year and/or in 2009 the state may have to borrow from the U.S. Treasury. The decline in the trust fund balance during the past eight years has been gradual but persistent with the annual loss of reserves exceeding $100 million in five separate years. The largest annual decrease was $650 million during 2003, but a similar decrease would have occurred in 2002 had the state not received a one-time disbursement of $344 million under the Reed Act.

For any UI program that experiences a major loss of reserves, the underlying explanation is that benefit outlays have exceed tax revenues. To provide some historical perspective on Ohio’s recent experience, annual UI benefits and taxes have been traced over the 53 years between 1955 and 2007. Benefit payouts and tax receipts were measured relative to total payroll.

Chart 1 displays both series. The volatility of benefit payouts is clearly illustrated with recession years such as 1958, 1961, 1975, 1980, 1982 and 1991-92, and 2002-03 having obvious high payout rates. Note however that the years with payout rates exceeding 1.5 percent of payroll all occurred before 1985. Payout rates during the past two recessions have not matched the high levels of the earlier recessions.

A general pattern of payouts exceeding revenues during recessions is obvious in Chart 1. Note also how effective tax rates (tax receipts as a percent of payroll) then increase following recessions and exceed the benefit payout rate during subsequent postrecession years. This is most obvious during 1964-1967, 1984-1987 and again during 1993-1996. The pattern is anticipated in a UI program with a trust fund and experience rating. Trust funds decrease during recessions and then are restored during post-recession years as taxes increase in response to the trust fund drawdown.

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