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Industry Insider

By Delaney Newberry
Director of Human Resource Policy
Michigan Manufacturers Association
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Michigan’s employer-financed unemployment insurance (UI) system is in serious trouble, and job providers have been called to action to get the system back in shape.

Every year since 2000, the amount paid out in benefits has exceeded employer contributions to support Michigan’s UI system. This upside-down system suffered a critical blow in the 2007 recession. Faced with the highest unemployment rate in the nation, Michigan turned to the federal government, borrowing the money needed to continue paying benefits. As unemployment rose and businesses closed their doors or moved out-of-state, the problem snowballed. We rang in 2011 with a $3.8 billion debt to the federal government.

Since 2010, negative balance employers have paid an additional $67.50 in solvency taxes to pay interest on the loan obtained from the Department of Labor (DOL) in 2008. The funds collected from solvency taxes are not sufficient to cover the interest payment that was due on Sept. 30, 2011, so Michigan has to fund a $41 million shortfall. A shortfall of $70 million is also expected next fall and Michigan’s Unemployment Insurance Agency (UIA) is indicating it may turn to positive balance employers to find the funds to cover shortages in annual interest payments.

Any kind of special assessment to positive balance employers to cover interest payments will be a first for Michigan. Employers have been feeling the pain of the system’s indebtedness to the federal government since 2010, when both negative and positive balance employers saw their federal unemployment (FUTA) taxes rise due to federal tax penalties. The FUTA penalty of 0.3 percent per employee per year is assessed in all states with loan balances that are outstanding more than two years. The FUTA penalty will continue to accumulate each year until the debt is repaid — adding an additional $21 per employee each year.

That isn’t the end of the rising expenses for employers, either.

Looming on the horizon, should we continue on this path of indebtedness, is the much larger tax penalty known as the Benefit Cost Rate (BCR) Add On. The BCR penalty applies to employers in states that have outstanding indebtedness for five years and have not made significant changes to their system to move toward solvency.

The BCR penalty would add between $189 and $233 per employee to a company’s tax bill. Keep in mind that the BCR would apply in addition to all other state and federal unemployment tax and penalty obligations. Never before has the BCR penalty been applied to a state, and there is no doubt that it will have a chilling effect on the ability of employers to hire and invest in our state.

There are a number of ways that Michigan can restore solvency to the UI system and put an end to federal tax penalties for employers. Earlier this year, Michigan led the nation with strong action to reform the unemployment system. On April 12, 2011, Gov. Rick Snyder signed into law Public Act 14 of 2011, which will return over $380 million per year to the state UI trust fund by reducing the number of weeks benefits are paid from 26 to 20 and by dedicating a special fund for the prevention, discovery and collection of UI benefit fraud and overpayments.

A number of states have turned to the capital markets for a solution to their debt problems. By issuing bonds to repay their loans, states can eliminate federal tax penalties and gain some certainty and control on interest rates assessed against the debt. However, employers would still pay hefty debt service assessments.

A pair of legislative proposals is pending before the Michigan Legislature which would create hundreds of millions in savings.

House Bill 4781, introduced by Rep. Wayne Schmidt (R-Traverse City), would put an end to costly benefit spiking and clarify employer eligibility for seasonal employer designation. Switching the unemployment system from a quarterly formula for computing benefits to an annual formula would provide consistency and inject fairness into the system. This reform, passed by the House Commerce Committee in June and awaiting a vote before the full House, is estimated to save $150-$250 million per year.

HB 4782, proposed by Rep. Joe Haveman (R-Holland), is also awaiting full House consideration. To deter individuals from collecting unemployment benefits in preference to accepting a lower paying job or one with comparable compensation to benefits, this bill would require claimants to diligently pursue suitable work. The legislation would also disallow benefits for workers who are terminated with cause including underperformance and regular attendance issues.

Fixing our state’s broken UI system through these and other reform measures will be high on MMA’s legislative priorities this fall. We encourage all employers to contact their legislators and urge them to make UI reform one of their top priorities as well.

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