Idaho, like most U.S. states, has struggled to keep its unemployment insurance fund solvent. The unemployment trust fund already faced insolvency once as a result of the 2008 recession. This insolvency was caused by a rapid rise in the number of unemployed citizens entering the system and a 2005 law that lowered the tax multiplier used to determine the size of the trust fund. Under the 2005 law the unemployment fund was built to handle only 80 percent (.8) of the typical recession experienced in the past 20 years.
Under Idaho’s unemployment insurance program, each business pays a tax rate based on its experience with the fund—a company that lays off many people pays more than one that has never done layoffs. The fund quickly became insolvent when the long recession hit. It was replenished by a $202 million loan from the federal government in June 2009, which Idaho has since repaid through the sale of revenue bonds. The multiplier also has been modified; according to the Tax Foundation, it now will be allowed to float up one-tenth of a percent each year, capping out at 1.5 in 2018. This will allow the fund to remain solvent for up to 18 months.
In the deal Idaho made to receive stimulus funds under the American Reinvestment and Recovery Act, the state received $32.2 million in exchange for liberalizing benefits. According to Bob Fick of the Idaho Department of Labor, this included extending benefits to part-time workers who were laid off and wanted to work only part-time and to unemployed people in approved training programs. The liberalization also included using the last or fifth quarter of wages in calculating eligibility if the first four of the last five quarters do not qualify the applicant.
Considering the efforts Idaho has made to bring its fund back into solvency, recent news about the increasing level of fraud and overpayments in the state’s unemployment system should concern everyone. Although the state has successfully reclaimed around $24.8 million in unemployment insurance overpayments since 2007 through new initiatives to find and penalize abusers, the Idaho Department of Labor forecasts there will be $13 million in overpayments in 2012, well above the five-year average of $9.8 million, according to the Associated Press.
Idaho lawmakers should keep in mind two principles in undertaking the needed modernization of the state’s failing unemployment insurance fund:
* Resist the urge to raise unemployment taxes.
Raising the unemployment insurance tax would do little to improve the system, and it may drive businesses out of the state.
* Move away from a state-based system, toward 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.
The following articles examine unemployment insurance overpayments, waste, and abuse from multiple perspectives.
Research & Commentary: Unemployment Insurance Fraud and Overpayments
This Heartland Research & Commentary on unemployment insurance examines the growing problems many states are facing because of unemployment insurance overpayments, waste, and abuse.
Unemployment Fraud Adds to Employer Costs
John Miller of the Associated Press discusses Idaho’s efforts to combat unemployment fraud and notes how unemployment fraud and abuse can increase the cost of unemployment insurance taxes for employers.
Idaho Took Federal Money for Unemployment Insurance Costs, but Has Paid it Back
Mitch Coffman of the Idaho Reporter writes about Idaho’s recent solvency problems with its unemployment insurance fund and the measures the state took to replenish and reform the program.
Overpaid Unemployment Benefits Top $14 Billion
Annalyn Censky of CNN Money discusses a recent report from the U.S. Department of Labor, which found the states and federal government overpaid an estimated $14 billion in benefits in fiscal 2011. Censky examines what states are doing to recover the money.
Wasting Billions on Unemployment Insurance Overpayments
Bill Conerly, a senior fellow with the National Center for Policy Analysis, contends the public accepts a high level of unemployment overpayments as a routine cost of doing business, instead of treating it as waste and fraud that must be stopped.
Failures of the Unemployment Insurance System
Chris Edwards and George Leef of the Cato Institute describe the origins and structure of the unemployment insurance system. They critique the justifications given for government-run UI system and discuss the economic distortions the system creates. The UI system raises the cost of hiring, creates a disincentive to work, reduces the incentive to save, and subsidizes some businesses and workers at the expense of others, the authors note.
Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds
Writing for the Tax Foundation, Joseph Henchman recommends several significant improvements states can make to the unemployment insurance taxation and benefits programs. States could offer more innovative and sustainable methods to find jobs for both the short-term and long-term unemployed while preserving benefits to support them in the meantime. These options include eliminating the firewall between administrative costs and benefits, reducing cross-subsidies through greater use of experience ratings, relying more on face-to-face training and advising, adopting elements of state workers’ compensation programs, and experimenting with individual accounts to encourage saving. These changes can help programs concentrate on ensuring a viable safety net for transition periods between jobs.
A Quantitative Analysis of Unemployment Insurance in a Model with Fraud and Moral Hazard
David L. Fuller of Concordia University analyzes the provision of unemployment insurance in an environment with unobservable job offers and unobservable employment status. Fuller finds unemployment insurance fraud amounts to 10 percent of total benefits paid and reduces national welfare by around 1 percent. He found the nation would be better off relying on welfare payments instead of the current system of unemployment benefits.
Comparison of State Unemployment Insurance Laws 2011: Overpayments
The U.S. Department of Labor examines state law provisions for identifying, establishing, and collecting UI benefit overpayments. All states have laws addressing these matters, and they differ in the treatment of overpayments in which the claimant is not at fault and those in which the claimant has committed fraud or willful misrepresentation or concealed material facts.
Increased Focus on Program Integrity Could Reduce Billions in Overpayments
The Government Accountability Office reports on the extent and type of overpayments in the unemployment insurance program, including those attributable to fraud or abuse, and identifies factors that contribute to overpayments and actions taken by the Labor Department to increase program integrity.
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 Heartlander’s Finance and Insurance News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].