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Trust Fund Review Senate Finance Committee David L. Clegg Deputy Chairman & Chief Operating Officer

March 9, 2011


North Carolina Employment Nonfarm Employment January 2007-December 2010 (Seasonally Adjusted, in thousands)

4,300 4,200 4,169,500

4,100 4,000 3,900

National recession began December 2007

3,904,100

3,896,700

3,800 3,700 3,600

National recession ended June 2009 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

3,500

December 2010 data are preliminary, other 2010 data are revised, while all other data are benchmarked.


North Carolina Situation 

As of December 2010 

215,665 more individuals unemployed in North Carolina than in December 2007 Lost 272,800 jobs  Need to add 4,547 net jobs a month for the next 60 months to reach December 2007 employment levels Total Private Jobs decreased 306,700 (8.8%)


State and Federal Benefits 

Benefit Weeks 

Regular Unemployment Insurance 

Extended Benefits – 

(EUC Tier III) – 13 weeks

Extended Unemployment Compensation Tier IV 

(EUC Tier II) – 14 weeks

Extended Unemployment Compensation Tier III 

(EUC Tier I) – 20 weeks

Extended Unemployment Compensation Tier II 

EB – 20 weeks

Extended Unemployment Compensation Tier I 

UI – 26 weeks

(EUC Tier IV) – 6 weeks

Individuals may be eligible for up to 99 weeks of benefits


NC UI Benefit Payments January 2010 – December 2010 $5.43 Billion Total Benefits $3.45 Billion Federal Benefits $1.98 Billion in State Benefits $955.2 Million in Tax Collections (Trust Fund and State Reserve)


-9 1

-9 0

Ju l-9 2 Ju l-9 3 Ju l-9 4 Ju l-9 5 Ju l-9 6 Ju l-9 7 Ju l-9 8 Ju l-9 9 Ju l-0 0 Ju l-0 1 Ju l-0 2 Ju l-0 3 Ju l-0 4 Ju l-0 5 Ju l-0 6 Ju l-0 7 Ju l-0 8 Ju l-0 9 Ju l-1 0

Ju l

Ju l

UI Trends - Taxes and Benefits

2,500,000,000

2,000,000,000

1,500,000,000

1,000,000,000

500,000,000

0

Taxes Benefits


Ju l-1 0 N ov -1 1

Ju l-0 9

Ju l-0 8

Ju l-0 7

Ju l-0 6

Ju l-0 5

Ju l-0 4

Ju l-0 3

Ju l-0 2

Ju l-0 1

Ju l-0 0

Ju l-9 9

Ju l-9 8

Ju l-9 7

Ju l-9 6

Ju l-9 5

Ju l-9 4

Ju l-9 3

Ju l-9 2

Ju l-9 1

Ju l-9 0

UI Trends - Trust Fund Balance

3,000,000,000

2,000,000,000

1,000,000,000

0

-1,000,000,000

-2,000,000,000

-3,000,000,000


Purpose of UI Trust Fund •

Provide temporary assistance to those who have lost their jobs through no fault of their own

•

Help stabilize the economy in times of economic downturn.


Title XII of Social Security Act 

“…provides for state advances (loans) when a state determines their Unemployment Fund will not have adequate funding to allow for the payment of Unemployment Benefits.”

 Current

loan balance: $2,631,866,556


Tax Changes 

March 1994: (Senate Bill 151 – Extra Session 1994)   

February 1995: (Senate Bill 13 – 1995 Session) 

50% tax rate reduction when fund balance equals or exceeds $800m Employers with a credit ratio of 6.4% or more received a tax rate of .01% Also reduced new employer tax rate from 2.25% to 1.8% Employers with a credit ratio of 5% or more received a tax rate of 0%

July 1995: (Senate Bill 180 – 1995 Session) 

Imposed a 60% overall tax rate reduction on employers with a credit ratio when the fund ratio was equal to 5.0% or greater


Tax Law Changes 

February 1996: (Senate Bill 2 – Extra Session 1996)  

Provided a tax moratorium for all credit ratio employers for 1996 Also lowered new employer tax rate from 1.8% to 1.2%

July 1999: (House Bill 275 – 1999 Session) 

  

Training and Reemployment Contribution provided a 20% reduction in employer tax rates while imposing a corresponding 20% contribution for Department of Community College training programs and ESC reemployment services Expanded 0% tax rate to employers with credit ratios of 4% or greater Lowered new employer tax rate from 1.2% to 1.0% Repealed 1-1-2011


Tax Law Changes 

July 2003: (HB 1241 – 2003 Session) Imposed a delay in collection of 20% unemployment surtax for one year. 2003 – NC issued $172 million in Tax Anticipation Notes (TAN) to pay Federal Loans. 2004 – NC issued $269 million in TANs to pay additional borrowing. These bonds were repaid in 2005. August 2005: (SB 757 – 2005 Session) Raised trigger for 50% tax reduction from $800 million to 1.95% of gross taxable wages reported to ESC.


Benefits vs. Tax Collections (in thousands) Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Tax Collections $225,540 $150,656 $177,130 $291,593 $327,527 $326,670 $319,337 $367,970 $602,211 $803,674

Benefits $307,804 $398,847 $371,708 $385,790 $419,319 $459,685 $706,494 $1,192,915 $1,196,798 $1,056,019

Trust Fund $1,499,887 $1,383,604 $1,279,586 $1,272,798 $1,267,232 $1,219,353 $ 906,711 $ 368,517 $ <23,433> $<273,232>


UI Trust Fund Report Months

Taxes

Total Benefits

State Reserve

Interest

Balance

JULY 2008

907,454,994

1,032,703,139

171,052,000

20,464,298

414,673,061

JULY 2009

855,942,820

2,321,036,300

153,980,000

10,558,388

(885,882,030)

JULY 2010

786,066,147

2,413,298,782

125,458,000

49,877

(2,387,606,788)

DEC 2010

368,697,000

569,527,670

0

0

(2,588,437,458)


Trust Fund Monetary Flow - Regular Employer Contributions

Trust Fund Interest

Trust Fund Benefits Paid


Trust Fund Monetary Flow - Recession Trust Fund Interest Employer Contributions Federal Loans

Trust Fund

State Reserve Fund

Benefits Paid


Compounding Factors •

Short recovery period between recessions • Recession 2002-04 • Recession 2008-10

Increase in the average duration of weeks • Avg. duration 1st Qtr. 2009 – 13.2 weeks • Avg. duration 4th Qtr. 2010 – 18.2 weeks

Severity of the recession


Individuals Exhausting Benefits Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Number of Individuals 42,564 74,072 135,370 141,892 115,456 94,240 96,747 100,241 132,019 310,305 283,304


Appeals G.S. 96-15  

Claim Adjudicated Appeals Referee - Aggrieved Party may appeal the adjudicator’s decision within 15 days of the date of notification or mailing of conclusion. Commission – Aggrieved Party may appeal the referee’s decision within 10 days of the date of notification or mailing of the decision rendered in the appeals hearing. Court System – Aggrieved Party may appeal the Commission decision to Superior Court within 30 days of notification of Commission decision


Appeals Decisions Rendered 

Appeals Referee 

Claimant 

Employer 

Ruled in Favor Ruled in Favor

Second Level Appeals 

37,407 49.3%

16,158 54.6%

10,576

Claimant 

53,565

Ruled in Favor of Employer

Employer

7,926 80.9%

2,650


Experience Rated Accounts   

Annual Computation July 31 Average Tax Rate 2011: 1.8% 2011 Tax Rates 

197,691 Experience Rated Employers 

59,972 Higher (30%) 

13,000 came off New Employer Tax rate

68,812 Lower (35%)  68,907 No Change (35%) 


Employer Accounts 

197,691 Liable Employers 

8,774 Employers with the highest capped tax rate of 5.7%

25,087 Employers with 0% tax rate 

0% Tax rate is available to employers who have a credit ratio of 4% or greater


Time Line 

February 2009 – First Advance by NC of Federal Loan January 2011 – Interest starts accruing on Federal Debt September 30, 2011 – Interest Payment Due  

Current Rate is 4.0869% $100 million in State Reserve to pay interest

November 10, 2011 – Principal Balance due to avoid FUTA credit reduction


Federal Loan Request and Repayment 

Governor or designee submits a request to the Secretary of Labor estimating amounts to be borrowed for each month of a consecutive three month period. Secretary of Labor certifies to Secretary of the Treasury the amounts that a State can borrow each month. State can access the amount of funds needed electronically.


Federal Loan Request and Repayment ď Ž

ď Ž

A State may elect to repay loans with any funds available at the end of each day over a specified period. North Carolina sweeps all revenue collected each day to pay benefits before borrowing.


Federal Loan Request and Repayment 

Interest rate applicable to a calendar year is the rate of interest paid on balances in the Unemployment Trust Fund (UTF) for the fourth quarter of the prior calendar year.

Interest rate on outstanding balances for 2011 is: 4.0869 percent.

Interest cannot be paid directly or indirectly from funds in a State’s account in the UTF.

A State cannot use grant funds or Reed Act funds to pay interest.


FUTA  

Federal payroll tax on employers at 6.2% on a taxable wage base of $7,000 Employers in States that are in compliance with Federal Regulations are given a 5.4% credit on their FUTA A tax credit reduction of .3% annually on States with Federal loan balance outstanding for 2 consecutive Januarys 

If NC’s debt is not paid by November 10, 2011, employers effective FUTA tax rate will increase from . 08% to 1.1%. Currently, employers pay $56 per employee. The increase would raise the FUTA tax to $77 per employee.


FUTA Tax Issue


Current Proposals 

 

President Obama proposed in his budget to give State’s a two year moratorium on the interest. Provides a delay in the FUTA tax penalty Also provides for a increase in the taxable wage base while lowering the FUTA tax rate


Senate Bill 386 

Senator Durbin proposed a bill similar to Obama’s proposal except: 

Would provide a partial forgiveness on the debt principle if States meet certain criteria


Congressional Action •

Extension of the Emergency Unemployment Compensation through December 2011

Extension of the interest free borrowing?

Eliminate the FUTA credit reduction?

Loan forgiveness?


Policy Options  Do

Nothing

 Adjust

 Trust

Existing Statutes

Fund Solvency


Do Nothing 

Make interest payments at Federal Rate and continue to borrow from Federal Trust Fund Allow FUTA tax increases to apply to outstanding balance. 

.3% increase in FUTA rate annually until loan is settled Cost to employers: $56 to $77 per employee; $83 million first year 

By 2015, the rate would be 2.3%, or $161 per employee


ESC Internal Committee Recommendations Incrementally increase Taxable Wage Base

 

60% - 2012; 70% - 2013; 80% - 2014 

Cost to employers:   

$10 - $20 million – Year 1 $30 - $40 million – Year 2 $30 - $40 million – Year 3

Require approximately an additional $700 million in collections to replenish the trust fund


ESC Internal Committee Recommendations

Adjust Standard Beginning Rate 

 

Change the Standard Beginning Rate from 1.2% to 2.7%

Eliminate 0% Tax Rate Adjust the tax rates for Debit Ratio Employers 

Current Rates are 2.9% - 5.7% 

Approximately 17,000 employers have a deficit balance in their ERA


ESC Internal Committee Recommendations 

Adjust the standard beginning rate 

Currently new employers rate is 1.2% for 2 years 

Oklahoma and South Dakota have rates this low

USDOL recommended new employer rate of 2.7% 

Generate $38 million a year


ESC Internal Committee Recommendations 

Modify Existing Tax Schedules 

Have been at the highest tax schedule allowed by statute since tax year 2003 Current Highest rates: Credit Ratio Experience Rate – 2.7%  Debit Ratio Experience Rate – 5.7% 


Bond Issuance 

 

Existing debt is not a general obligation of the State Bonds would be a general obligation Tax Anticipation Notes (TAN) are not a general obligation but are capped at 50% of the anticipated annual revenue


Lynn R. Holmes Chairman esc.chairman@ncesc.gov 919.733.7546 David L. Clegg Deputy Chairman & Chief Operating Officer david.clegg@ncesc.gov 919.733.4636 P.O. Box 25903 Raleigh, NC 27611-5903

Presentation from the NC Employment Securities Commission  

A presentation showing employment numbers and benefits paid out in 2010

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