Policy Documents

Research & Commentary: Reforming Texas's Unemployment Fund

Matthew Glans –
August 24, 2009

As the economy remains in the doldrums, the unemployment compensation fund in Texas has become insolvent. The state's unemployment rate stood at 8 percent as of June. According to the Dallas Morning News, the state government paid out around $64 million in benefits in March, more than twice as much as in the same period last year.

Texas's unemployment insurance program is in dire need of reform. The fund has been greatly strained by the current economic crisis and was finally exhausted in July. The depletion of the unemployment fund necessitated a $643 million dollar loan to the Texas Workforce Commission from the federal government to enable the state to pay claims.

Where did all the money go? That a state with an unemployment rate of 8 percent—far from exceptional by historical standards—has nearly depleted its funds suggests serious mismanagement. Before any increase in taxes or a federal bailout is even considered, a full review of the existing system should be conducted to determine where the problems lie.

Given the state’s record of poor management of the funds, privatization through individual unemployment accounts may be the best option for real reform. Individual unemployment accounts are a mandatory and portable individual trust to which the employer and employee contribute. These accounts shift control and responsibility for unemployment coverage from the employer and the state government to the employer and the employee. They offer the flexibility and individual choice many employees currently lack, allow individual employees more control over their money (which follows them from job to job), and lessen the administrative burden on the state.

Recent efforts to acquire aid from the federal government to pull the unemployment fund back into solvency through stimulus money were not approved by the Texas legislature and were opposed by Gov. Rick Perry. Critics of Perry’s stance argue that the state should have accepted the federal government’s previous offer of $556 million in stimulus dollars. These funds came with too many strings, Perry argued, including costlier benefits and higher taxes on Texas businesses, while not solving the revenue problem. That would just have laid the groundwork for further bailouts in the future.

Perry’s argument against the proposed bailout is a good one. Tax increases and federal bailouts do little to address the systemic deficiencies in the unemployment system; they merely allow the existing problems to survive and continue to grow. Real reform—reform that fundamentally reexamines the state's role in providing unemployment benefits—must get underway.

Texas Among States Facing 2009 Unemployment Insurance Fund Deficits
http://www.beaumontenterprise.com/business/local/texas_among_states_facing_2009_unemployment_insurance_fund_deficits_01-09-2009.html

Texas Unemployment Fund Running Low
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-unemployment_11tex.ART.State.Edition1.4abdc89.html

Unemployment Insurance Bill Dies In House
http://www.tylerpaper.com/apps/pbcs.dll/article?AID=/20090528/NEWS01/905280322

Texas made right decision on unemployment funds
http://www.chron.com/disp/story.mpl/editorial/outlook/6553891.html

Unemployment insurance can be both problematic and unfair for many workers. Part-time workers and those who shift jobs frequently receive no benefits despite their tax contribution, and workers who never need to use the unemployment safety net pay into a system for benefits they will never get. Waste and fraud also plague the system—in some states nearly 20 percent of all benefit payments are the result of error or fraud, according to the National Center for Policy Analysis.

While state officials believe the tax base for unemployment taxes has expanded and could withstand an increase that would do nothing to ensure that the program is working effectively at the least cost to taxpayers. Raising the unemployment tax would do little to improve the system, but it could drive many businesses out of the state.

Texas legislators should keep in mind these three points regarding the needed modernization of the state's failing unemployment insurance fund:

Resist the urge to raise unemployment taxes
While state officials believe the tax base for unemployment taxes has expanded and could withstand an increase, raising taxes does not guarantee the program will improve. Raising the unemployment tax would do little to improve the system, but such a move may drive businesses out of the state.

Move away from a government-based system and towards privatization
Privatization through individual unemployment accounts (IUAs) shifts control of and responsibility for unemployment coverage from the employer and the state government to the employer and the employee. This allows for greater individual choice and flexibility at less cost to the state's taxpayers.

Do not penalize part-time and temporary workers
In several states, part-time and temporary workers receive no unemployment benefits despite their tax contribution to the system, and workers who never need to use the unemployment safety net pay into a system for benefits they will never receive. A private IUA follows a worker and guarantees the benefits are not lost.

A Heartland Research & Commentary on unemployment insurance is available at http://www.heartland.org/policybot/results/23753/. It examines the changing role of unemployment insurance and the different approaches available to employers and employees through privatization.

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Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute's Web site at http://www.heartland.org and PolicyBot, Heartland's free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact me at 312/377-4000 or mglans@heartland.org.