Modernizing Texas’ Unemployment Insurance System

Senate Committee on Senate Committee on Economic DevelopmentEconomic Development

March 30, 2009

Don Baylor, Jr.Senior Policy Analyst

baylor@cppp.org

Texas Unemployment Rate in the Current Recession (Dec. 2007 - Feb. 2009)

6.5%

4.4%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

Dec07

Jan08

Feb08

Mar08

Apr08

May08

Jun08

Jul08

Aug08

Sep08

Oct08

Nov08

Dec08

Jan09

Feb09

Texas Unemployment is SoaringUp 52% since beginning of recession

• 102,000 jobs lost in Jan & Feb 2009; worst 2 monthly job losses on record

• Unemployment rate may not peak until 2 years after recession ends

• TX ranks 50th in UI recipiency rate(TX: ~22%;US avg: 39%)

Sources: Texas Workforce Commission, CPPP Analysis.

2

262,000 more Texans

unemployed since December

2007

Things to Remember about UI

• Only eligible if lost job through “no fault of their own” and must actively search for work

• UI Claimants receive less than ½ of previous salary (35% of average weekly wage)

• Duration=26 weeks (Avg TX duration=13 weeks; U.S. average =15 weeks.)

• Current UI eligibility disadvantages working mothers

Unemployment Insurance Modernization Act/ARRA

• Provides $7B in incentive funding for states to modernize UI eligibility

• Potential TX Share: $555.7M• To draw down funds, states must make

policy changes (if not already enacted)• Changes must be enacted by 2011

– Implementation can be delayed up to one year after certification (Summer 2010)

4

Why UIMA Reforms Are Good for the Texas Economy

• Stimulates Consumer Spending: $1 in UI Benefits ~ $2.50 in Econ. Activity ($1.2B over 7+ years)

• Lessens demand on state-funded social services (CHIP, Medicaid, TANF)

• Would reduce Deficit Tax by nearly 70%, and average tax rate by 10-20% in 2010

5

Employer Deficit Tax will be Levied to Rebuild Trust Fund

6

Deficit

tax rate:

1.09%

Deficit

tax rate:

0.34%

Employer Deficit Taxes in 2010 Could be Cut by 70%by Collecting UIMA Incentive Funding

$935 M

$294 M

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

TX Does NOT Collect UIMA Funding TX Does Collect UIMA Funding

Em

plo

yer

Def

icit

Tax

es (

$M)

Deficit

tax rate:

1.09%

Deficit

tax rate:

0.34%

Source: Texas Workforce Commission, CPPP Analysis

UI Reforms toDraw Down $555M

Best Reform Package• Alternate Base Period• Comparable Work

Search (Part-time)• Compelling Family

ReasonsConforming Legislation:

CSHB 2623/CSSB 1569

Source: Texas Workforce Commission, CPPP Analysis

7

UIMA Benefits as Share ofTotal Benefits Paid, 2010

UIMA Benefits

3%

Current Benefits

97%

Alternate Base Period• Legacy of manual

wage records• 20 states use ABP

(GA, OK, NM, VA)• Passed TX House

(2007)• Additional UI

Benefits per year (~$40M)

• Required to access any federal funds ($185M)

2Q

08

W

3Q

08

W

4Q

08

W

1Q

09

W

2Q

09

(W)Filing

1Q

08

W

2Q

08

W

3Q

08

W

4Q

08

W

1Q

09

WLag

2Q

09

(W)Filing

Standard Base Period

Alternate Base Period

8

Comparable Work Search(Part-Time)

• Many workers are limited to part-time work due to compelling reasons, especially working mothers

• “Full-time” Work Search Requirement NOT in Statute or Rule

• Additional UI Benefits/year ($15-27M)

9

Compelling Family Reasons for Leaving Work

Current LawTrailing Spouse

– No waiting period for military spouses; 6 wk waiting period for civilians

Family Illness– Available for spouse, minor

child

Domestic Violence – Must present either police

report, protective order, or physician’s note

Proposed ChangesTrailing Spouse

– eliminate 6 week waiting period for civilians

Family Illness – include parents as part of

“immediate family”Domestic Violence

– Can provide other forms of documentation (e.g. attorney, shelter worker)

(UI DV denials are mostly due to documentation barriers)

Additional UI Benefits/year ~ $3M/year

Unemployment Compensation Trust Fund: The Basics

• Taxable Wages (first $9,000 per worker)• Ceiling = 2% of Taxable Wages (~$1.7B)

– If above, Employer Rebates are issued• Floor = 1% of Taxable Wages (~$860M)

– If below, Deficit Tax imposed• 2008: $1.16B in Employer Contributions

– $1.35B in UI Benefits• 2009 Claims at least 2x higher than 2008• Oct. 1 Projection: $812M below Floor

– No TEF/SDF Transfers from Holding Fund

11

Why the Trust Fund is Insolvent• Tx ranks 47th in

UI tax rates on total wages

• Low ceiling prevents buildup of reserves

• “Backwards Financing” Model

• Issued $1.4B in bonds in 2003

• Will need to borrow $2-$4B to keep Trust Fund afloat (2009-2011)

12

Source: Texas Workforce Commission, CPPP Analysis

Taxable Wage Base Not Keeping Up With Total Covered Wage Growth in Texas (1990-2007)

Total Covered Wages

Taxable Wages

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$ B

illio

ns

74% Growth

189% Growth

Gap between Total Wages and Taxable Wages has widened from 3:1 to 5:1

Deficit Spending a Key Driver of UI Tax Increases

Employer Taxes Rise at Worst Possible Time,When Economy Is Weakest

Average Tax Yield

3.07%Annual Percent Change in GSP

1.90%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009* 2010*

Ave

rag

e T

ax Y

ield

1%

2%

3%

4%

5%

6%

An

nu

al P

erce

nt

Ch

ang

e in

Rea

l G

SP

13*projected

Source: Texas Workforce Commission & Texas Comptroller, CPPP Analysis

Texas Commission on Unemployment Insurance

• Financing

• Long-Term Solvency

• Access

• Eligibility

• Administrative Efficiency

• Technology

• Impact of UIMA Reforms

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