Today the Rhode Island Public Expenditure Council (RIPEC) released a report reviewing Rhode Island’s unemployment insurance program, the status of the trust fund, and potential steps to restore the fund to solvency. 

Persistent unemployment and weak unemployment trust funds throughout the country have led approximately 30 states to exhaust their reserves.  As a result, states have had to borrow from the federal government in order to continue funding benefits.  To date Rhode Island has borrowed $225.5 million from the federal government – the equivalent of $214 per capita – and the Rhode Island Department of Labor and Training (DLT) estimates that borrowing will continue through May 2011.  Currently, the State estimates that this level of borrowing will result in $24.0 million in interest charges alone through 2012.

Continued borrowing from the federal government and prolonged insolvency will have a negative effect on the State’s economy.  Low trust fund balances result in higher payroll tax rates for employers, who will also see a reduction in their federal unemployment tax credit.  Further, borrowing triggers an additional solvency tax as states are prohibited from making interest payments from their normal UI tax levies.  These tax increases may hamper an already slow recovery, particularly if businesses pull back on hiring as a result of the additional costs.

The DLT has put forth a total of nine proposals designed to restore the fund to solvency, two of which focus on the financing of UI benefits and seven of which would change benefits.  Given the state of the trust fund, and the long-lasting implications for economic development in the State if the situation is not resolved, RIPEC believes that it is imperative that changes are made to modernize the financing structure and to bring benefits more in line with the rest of the country.  

RIPEC recommends that the State evaluate these proposals using the following criteria:

• Do the changes support the economic theory behind unemployment insurance?
• Will the adjustments present undue hardship to businesses or employees through increased costs?
• Is it possible to achieve a more equitable financing structure through these modifications?
•  How does the State’s financing structure and benefits compare within the region and nationally?  Would these changes bring the State more in line with the rest of the region and the country?
• Are these changes in line with what other states are proposing?
• What are additional or other changes that should be considered (e.g., exploring the possibility of bonding to repay the federal loan in order to avoid the FUTA penalty)?
• Should the State look into ways of providing unemployment insurance tax relief for companies that are re-hiring?
• What are the implications for businesses if action is not taken or if there is a delay in action?