Why employer UI taxes are down: concealment and substantial fault

A previous post noted that unemployment taxes for employers are going down because the reserve fund’s cash balance is currently and expected to remain more than $500 million.

This success is remarkable, especially since it did not come about because employers’ taxes have been raised substantially. To be sure, the higher unemployment during the Great Recession led to the highest tax schedule — Schedule A — being implemented. And, for three years, 2011 to 2013, the FUTA tax credit available to employers was reduced.

But, recall the UI debt hole Wisconsin was in during the Great Recession. In March 2011, Wisconsin owed just over $1.6 billion because of borrowing to cover unemployment benefits being paid out. Only eleven other states ever owed more during this recession.

One point six billion dollars is a big hole to climb out of. As noted in a recent GAO report, some states reduced the number of weeks claimants were eligible for benefits as a way to fix their UI debt problems. In short, rather than making employers pay more, these states limited the ability of claimants to collect benefits in the first place. With less benefits being paid out, the taxes employers paid went further.

Other than the introduction of a waiting week before unemployment benefits begin being paid out, Wisconsin did not shorten the total weeks of unemployment eligibility. But, Wisconsin did other things on the benefit side of the equation that have starkly reduced the amount of benefits being paid out to claimants.

As noted previously, Wisconsin has been exceptionally aggressive on charging claimants with concealment and is proposing both increased penalties and stricter compliance standards to be applied to claimants that would effectively charge them with fraud when making honest mistakes on their claims. As the Department’s own fraud report shows, DWD has been taking in over $20 million a year the past two years in over-payment collections alone. Forfeiture penalties and charges against future unemployment benefits add significantly to the amounts flowing back into the reserve fund from claimants.

But, forfeiture over-payments and collections only tell part of the story. Department staffers have publicly noted that benefit payments are now at historically low levels. Indeed, at the May 19th Advisory Council meeting it was noted that Wisconsin has not seen such low levels of benefit payments since 2000, fifteen years ago. The big question is why benefit payments in Wisconsin are so low right now.

A look at 2013 and 2014 financial reports to the Advisory Council show large declines in 2014 in benefits being paid to claimants. The benefits charged to taxable employers for the past three years when employees were discharged are:

2012 - $788,019,106.15

2013 - $714,257,663.70

2014 - $580,681,613.52

The ratio of current year benefit payments to benefits paid the previous year, are 0.91 in 2013 but 0.81 in 2014. In other words, there was a nearly 20% decline in benefit payments in 2014 when compared to 2013, nearly double the decline in benefit payments from 2012 to 2013.

Benefits being paid to employees who quit also declined sharply in 2014.

2012 - $85,799,497.23

2013 - $81,861,854.13

2014 - $69,388,417.56

The 2013 ratio of benefit payments relative to the previous for quits was 0.95. That ratio in 2014 declined to 0.85, nearly three times the decline seen in 2013.

These declines in benefit payments in 2014 directly arise from changes in unemployment law contained in the 2013 budget act — 2013 Wis. Act 20 — regarding the elimination of numerous quit exceptions and the adoption of a new, substantial fault standard for discharges (see this previous post about these changes being included by the Joint Finance Committee in the budget bill). Understand that the original estimates presented to the Joint Finance Committee for these changes in unemployment law were a reduction of $14.1 million in benefit payments during the first fiscal year and a $23.1 reduction in benefit payments during the second fiscal year. As noted above, the actual decline for quits alone in 2014 was just over $12 million, and for discharges the decline was approximately $134 million.

NOTE: The financial reports given to the Advisory Council lack specific data about the number of claims at issue. The recent report about the activities of the Advisory Council, however, states that the new substantial fault standard led to “4,654 denied cases in 2014. See p.7 of the activities report. Using the average claim duration of 15.3 weeks and the average weekly benefit amount of $285 from the Department’s 2015 financial report, see pp. 37 and 38, each substantial fault disqualification amounted to $4,360.50. Adding up all of the denied cases in 2014 means that $20,293,767 in benefits were NOT paid out that year, $4 million more than what the Department estimated in its 2015 financial report, see p.33 of the financial report.

Because the decline in benefit payments is significantly more than what can be pieced together from available data, using a ratio of benefit payments from one year to the next to track these changes indicates at least how extraordinary the declines in 2014 were and, as indicated below, provides a mechanism for predicting what will happen in 2015 using currently available data.

Estimates for 2015 show that the decline in benefits being paid pursuant to discharges will continue. Using data for the first four months of each year, the total amount of benefits estimated to be paid in 2015 to discharged employees will be just over $480 million, $100 million less than in 2014. And so if current trends continue, the estimated level of benefits going to discharged employees in 2015 will only be 83% of the already record low amount that went to discharged employees in 2014.

On the other hand, estimated benefit payments in 2015 for employees who quit will only be $3 million less from what claimants who quit received in 2014. That is, benefits paid to employees who quit are expected to be within 97% of the 2014 numbers. Accordingly, it appears that the application of the new quit standards to claimants has stabilized and subsequent declines in benefits pursuant to quits are unlikely.

The Department has yet to acknowledge the impact the substantial fault disqualification has had on the benefits being paid out to claimants. The Department’s estimates set forth in its 2015 annual Financial Outlook Report call for a $16 million reduction in benefits to discharged employees because of substantial fault (much less than the $100 million estimated here for 2015) and an $11.5 million reduction in benefits through the elimination of various quit exceptions (nearly $9 million more than estimated here for 2015 but similar to the decline in quit benefits seen in 2014). See pp. 32-3 of the report.

These estimates severely under count the impact substantial fault has had on claimants. In its Financial Outlook Report, the Department presents for the first time a public description of the new substantial fault standard:

Substantial fault essentially means that if an employer establishes a reasonable job policy to which an employee can conform, failure to conform constitutes substantial fault.

See p.33 of the report. According to the Department, then, employees are disqualified whenever they fail to follow a reasonable employee policy. Given how steep the decline in benefits has been for discharged employees in 2014 and the first four months of 2015, it is obvious that the Department has begun applying this broad conception of substantial fault.

And so, with less money being paid out as unemployment benefits, employers’ taxes could that much more quickly fill the hole in the reserve fund created by the Great Recession. There simply has been no need in Wisconsin to reduce the number of weeks claimants are eligible for benefits when those claimants are likely to be disqualified in the first place from receiving any benefits at all.

Finally, it should be noted that even though Wisconsin now has a positive reserve fund balance, the unemployment fund is still not all that healthy. Based on standard UI fund metrics, a recent Trust Fund Solvency Report shows that Wisconsin still fares about as well as most other states do — that is, not so well (see p.56 of the report). The fund’s solvency is rated at 0.13 and a minimum of 0.60 is needed for Wisconsin to be eligible for interest free loans to cover future benefit payments. For how Wisconsin compares to other states, see p.59 of the solvency report. Among mid-western states, Wisconsin fares worst except for Indiana and Ohio, which both still have outstanding debt. Presentations by the Department to the Advisory Council have described the reserve fund’s financial problems in detail. See, e.g., the presentation contained in the Advisory Council activities report, pp.16-44. But, raising employers’ unemployment taxes appears to be unnecessary when benefit payments to claimants continue to decline markedly.