The state’s unemployment fund was in the best of shape before the pandemic and is still healthy, but politicians and community leaders are worried it will be depleted by early 2021 if the economy does not bounce back as expected.
If the fund is depleted, as it was as a result of the Great Recession, a few options are available.
One is that Arkansas could use federal Coronavirus Aid, Relief & Economic Security Act (CARES) funds to plug holes.
State Sens. Keith Ingram, D-West Memphis, and Jonathan Dismang, R-Beebe, said the Arkansas Division of Workforce Services could also borrow money, interest-free, from the U.S. Department of Labor to pay claims. That loan would have to be paid back by the end of the federal government’s fiscal year, Sept. 30, 2021, or some interest would be levied.
Options aside, if the fund is emptied, employers would most certainly see an across-the-board increase in their contribution rates because that’s what would be needed to replenish it, according to the senators, Arkansas Secretary of Commerce Mike Preston and Randy Zook, president and CEO of the Arkansas State Chamber of Commerce and Associated Industries of Arkansas.
In addition, an employer’s contribution rate normally depends on factors that include how many people it lays off, much as insurance rates rise when a driver has accidents. Dismang is drafting legislation that would insulate from that kind of rate increase those business owners who laid off more employees than usual because the state mandated that their businesses be shuttered to slow the spread of COVID-19.
Dismang said his legislation could be retroactive in application, so it could be considered in either a special legislative session or the regular session in January.
In Good Shape
Preston said the state’s fund is capped at $1 billion and had been on track to hit that this year. If it had, employers would have enjoyed an automatic refund or tax decrease.
“That’s out the window now, and we’re calculating how long the trust fund can last at this point,” Preston said. “If we were to continue at the current burn rate that we’re going through with our claims, we’d have enough to last us right about to the beginning of March 2021. So we’re actually in fairly good shape,” he said, adding that the state is also seeing weekly claims trend downward.
He is still hopeful that Arkansas will not have to borrow federal funds this go-around, a path several other states have already taken.
Ingram said that, before the pandemic, the fund’s balance was close to $850 million, a “high-water mark” and two to three times what it was prior to the last recession. That’s partly due to reforms made to the state’s unemployment system then.
Arkansas borrowed $360 million from the federal government to shore up the fund in 2009.
He said the contribution rates for employers were then “modified to more adequately reflect what was needed in the trust fund,” and the number of weeks the unemployed could receive benefits was reduced to 16 from 26.
Ingram said that, as of June 16, the fund’s balance had dropped to approximately $714 million. In April, weekly claims rose from $6 million to peak at $22.7 million, he said. Weekly claims receded somewhat in May, to $18.4 million.
“There’s enough of a balance and a cushion that there’ll be time to work through this, and the safety net is provided by the federal government. Nobody will realize any difference if we said the trust fund is depleted in November,” Ingram said. “Then the federal government will fund the trust fund, and it will be seamless.”
He said employers’ contribution rates could be raised to rebuild the fund while the state pays back the federal loan.
Ingram also doesn’t believe the economy will return to full employment until a vaccine is developed, and that may be 12 to 18 months, so unemployment insurance will be a major topic of discussion during the regular legislative session in 2021.
“Again, a lot of this is going to depend on the length and severity of what we’re experiencing,” Ingram said. “And we’ll just know a lot more in January. We’ll know a lot more about our position in January.”
Dismang expects to see an increase in employers’ contribution rates then.
“I think there will be some increases; I’m just not sure how widespread it’ll be. It really depends on how long this carries through, as far as the COVID impact,” he said.
Preston said, “Where we have concern and we want to see a shift — right now, our solvency level is pretty strong and it remains high. … But there are certain triggers in place, by law, that if we get below a certain threshold, then you’ll see the [employers’ contribution] rate go up as part of the stabilization tax.”
At the current burn rate, he said, the fund would hit one of those triggers by Sept. 30. If that happens, the employers’ contribution rates would increase by one-tenth of a percent, or $10 per year per employee per business owner.
“So that’s something we would like to avoid if possible,” Preston said. “We’ve been talking to businesses who are concerned about that. They’re obviously worrying about having to replenish that trust fund, knowing that it’s the employers who have to pay into that to replenish it. So there’s been some initial talks about can we use some CARES funds, dollars, to keep us above that threshold so that trigger doesn’t happen and just in general help us keep the trust fund where it should be.”
Dismang said he hadn’t heard from employers directly, probably because they are more concerned about reopening their businesses right now. But he said several chambers of commerce had been in touch about the issue.
Zook, the state chamber president, said he’s hearing daily from employers who are concerned about the fund. But he called the state’s structured unemployment system “incredibly well run, well managed.”
Zook added that Arkansas is better off than some states because its unemployment rate isn’t as high.
The state’s seasonally adjusted unemployment rate rose from 5% in March to 10.2% in April, according to the most recent report from the state Division of Workforce Services. According to the U.S. Bureau of Labor Statistics, Arkansas is tied with Iowa and South Dakota for the ninth-lowest unemployment rate in the country.
Still, Zook said, “It is going to be a close call, but, presumably, the economy’s going to continue to, as it opens up, employment will continue to rebound, which will reduce the demands on that trust fund.”
If the fund is depleted, he said, “The employers are going to pay to refurbish and replenish it. That’s the way it always works. The employers are the sole source of income for that fund.”