Another Fund Is Nearly Bust

Fixing unemployment insurance will cost employers and workers a bundleTrenton

Over a period of more than 10 years New Jersey lawmakers have siphoned some $4.7 billion from the state’s unemployment insurance (UI) trust fund to pay back hospitals for care they give to individuals who are so-called charity cases or unable to pay.

Now, according to a report prepared for Gov. Jon Corzine, the bill is about to come due: the unemployment fund is nearly depleted and it looks like businesses may be forced to pick up the $400 million tab to bail it out.

“Federal guidelines suggest that the UI Trust Fund should maintain a balance equivalent to 12 months of benefits to ensure solvency, yet the state’s trust fund currently has less than four months of reserves,” notes the Labor and Workforce Development Transition Policy Group report that was released last month. “The UI Trust Fund cannot support any additional diversions for charity care.”

The fund is bankrolled by employer and employee contributions. Right now it’s in the black by $970 million, but even though that cushion is projected to rise to $1 billion over the next month, the report says that even a small increase in demand for the fund’s resources could trigger a statutory $300 million-to-$400 million increase in employer contributions.

“If the fund balance of the UI trust fund were to fall below $955 million as of March 31, 2006, it would trigger an increase in employer taxes, which would be estimated to cost employers an additional $300-$400 million in contributions in the tax year from July 1, 2006 to June 30, 2007,” according to the document, which is available on the governor’s Website.

The trends aren’t encouraging: New Jersey’s unemployment numbers edged up from 4.6% in November to 4.7% in December, even as the national rate inched lower. In any case, current state Department of Labor projections indicate the trust fund will need at least $300 million more from employers by the end of March 2007.

Filling that pool could have a ripple effect on the state economy. “In general, raising taxes acts as a disincentive to job creation,” says Briance Mascarenhas, a professor of international business at the Rutgers School of Business-Camden. “Existing businesses may remain in the state because they’ve already got a significant investment here, but a higher cost of doing business may drive new companies to reconsider New Jersey as a location.”

The report says that employees, too, would end up paying more to cover the fund’s shortfall through a modest increase in the UI tax that is withheld from paychecks. It also advises the state to take a closer look at businesses that may misclassify employees as independent contractors in order to avoid the UI and other taxes.

Corzine said he would prefer not to raise taxes when he took office last month. In his inaugural address, he pledged to “embrace” pro-growth and pro-business initiatives.

The new governor may be boxed in, however, says Barbra Casbar, the owner of Siperstein Fords Paint in Woodbridge. She worked with the task force of business owners, union leaders and others that issued the recommendations on the state unemployment insurance fund.

“The problem started with the state legislature, which has been pulling money from the UI trust fund for about 12 years under Democrats and Republicans,” Casbar says. “No one’s happy about the prospect of paying more taxes, but something has to be done to replenish the trust fund.”

Casbar employs a dozen workers at her shop, and says she’s unsure of how her business would be hit by the potential hike in unemployment taxes.

New Jersey is the only state that allows unemployment insurance trust money to be raided to help hospitals cover the costs of treating the uninsured or indigent. “The study [of unemployment insurance spending] was an eye-opener,” says Casbar. “Besides suggesting ways to bring the fund back to a higher cash level, one of the recommendations was to stop diverting the money in the future.”

But Mascarenhas sees a bigger problem. “If a state government keeps raising taxes, sooner or later people will leave the state and relocate to lower-cost areas,” he says. “The government needs to make some tough choices and reduce its spending, but right now there are no incentives to bring expenditures in line with revenues. Continued tax increases, however, are not a sustainable response.”

A Depleted Safety Net

What it is The unemployment insurance trust fund is a billion-dollar pool that pays benefits of up to $521a week to people who lose their jobs.

What’s wrong Over a period of a dozen years, the state has diverted about $4.7 billion from the fund to reimburse hospitals for care provided to low-income and other individuals. By next year the fund is projected to need a $300 million infusion of capital.

Who will pay to fix it Most of the burden will fall on businesses, but employees will also pick up some of the tab.

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