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Unemployment trust fund could dry up
By Tom Scheck
Minnesota Public Radio
January 28, 2002
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A Legislative Auditor's report says the state's unemployment insurance fund is well below the national average and could dry up early next year if the state's unemployment rates remains steady or rises. The report says the state's unemployment trust fund has decreased from $700 million in January 2001 to $434 million at the end of 2001. The report comes at a time when lawmakers are already dealing with the state's nearly $2 billion projected budget shortfall, but some lawmakers say the state needs to take some action or they'll will be forced to borrow millions from the federal government with interest.

•Minnesota has enjoyed lower than average unemployment insurance tax rates, higher than average benefit levels, and a growing fund balance since the recession of the early 1990s. These advantages have largely been the result of historically low unemployment rates.

•Minnesota's trust fund balance, however, is not large compared with those in other states and does not come close to meeting any of the benchmarks typically used to assess fund adequacy.
•Even a mild recession could deplete the trust fund and cause the fund to borrow from the federal government. The current recession may cause the fund to borrow in late 2002 or early 2003.

•Much of the problem with the unemployment insurance system involves the "base tax rate" schedule. The base rate is too often set at the minimum rate, which is insufficient to recover the costs of past benefits not recouped by "experience tax rates."

•Increasing the trust fund balance would help the state avoid future interest costs, diminish the need to raise taxes or cut benefits during a recession, and provide state policy makers with more flexibility in setting unemployment insurance tax policy.

See the complete report (pdf).

Source: Office of the Legislative Auditor

The Legislative Auditor's office says the state's unemployment trust fund suffered because the economy was doing too well. A portion of the trust fund comes from a tax on business owners, who are forced to lay off workers. There were relatively few layoffs in the mid- to late-'90s, so the trust fund wasn't growing adequately.

The latest economic downturn and the Sept. 11 attacks have forced Minnesota employers to lay off thousands of workers who are now filing unemployment claims.

"We're well below the national average and well below the typical benchmarks that are typically used to indicate whether or not the state has an adequate fund balance," according to John Yunker with the office of the Legislative Auditor. He says the state trust fund could be completely wiped out if a mild recession occurs. Yunker says the state's trust fund is 48 percent below the national average.

Even if the state's unemployment trust fund dries up, state workers will still receive benefits. However, the state would be forced to borrow money from the federal government at a 6-percent interest rate to maintain those benefits.

Minnesota's director of unemployment insurance programs says the state needs to fix the tax structure and the state's collection mechanisms as a way to reverse the dwindling trust fund.

Jack Weidenbach says the state is spending between $20 to $25 million a week on unemployment benefits. "The reason this exists is because the system is designed to not tax employers any more than necessary if they haven't caused layoffs. I think when the system was set up the way it is back in the late '80s, people weren't really thinking of an economy that would have 3 percent unemployment," according to Weidenbach.

Weidenbach says his department is working with the governor's office to come up with both a short-term and long-term solution to the problem. He said he wasn't sure if a complete overhaul of the system could be finished this year.

However, several lawmakers say they have to do something so the state can at least make sure it has money to pay interest if it needs a loan.

Sen. Ann Rest, DFL-New Hope, says she'll wait to hear Gov. Ventura's intentions to fix the problem. "The problem will reach, if not a crisis state, certainly a significantly dramatic state in early 2003. And that's too late to address the issues in a responsible manner. We should be doing it if not the long-term certainly the short term in 2002."

Rep. Dan McElroy, R-Burnsville, says lawmakers will address the short-term problems with the trust fund this session, but he doesn't think lawmakers can solve all of the all of the problems with the trust fund this year.

"Minnesota's benefits are the eighth-highest in the nation and that our benefits are above average while our premiums and cost to employers is below average. That's obviously an imbalance, we need to think about that. If we are going to lower benefits or raise base taxes, that will be a very big deal and I think its unlikely that can happen this year," according to McElroy.

The last time the state borrowed money from the federal government to fund the unemployment trust fund was in the late 1980s.

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