CT (HARTFORD BUSINESS JOURNAL) — he state’s unemployment insurance trust fund has gone broke, forcing the state to borrow hundreds of millions of dollars from the federal government to pay jobless claims as the coronavirus pandemic continues to inflict harm on Connecticut’s economy, state officials have confirmed.
That money will eventually have to be repaid by employers, who will face higher unemployment insurance taxes and fees in the years ahead.
The state’s unemployment insurance trust fund, which typically raises $800 million a year via employer taxes, ran out of money in August, forcing the state to borrow $402 million from the federal government to date, said Michael Lucente, the unemployment claims director of accounts within the state Department of Labor.
That loan has helped pay out jobless benefits in recent months, but there’s only enough money left ‒ $4.2 million ‒ to last the rest of this week. That will force the state to borrow even more from the federal government.
Connecticut has asked the feds for an additional $150 million in November and $250 million in December, but will only access the money when the trust fund is fully depleted, Lucente said.
It’s a similar scenario to the one that played out during the Great Recession, when the state borrowed nearly a billion dollars from the federal government to pay jobless benefits. It took seven years to repay that funding.
But the coronavirus pandemic has created even more dislocation from the workforce.
Since March 13, the state labor department has received 1.1 million state, federal and extended unemployment benefits applications; currently about 188,000 residents are filing for unemployment benefits weekly, DOL said.
That’s led to a huge drain on the unemployment insurance fund, which came into the recession with about a $700 million balance. Since March, the state has disbursed $5.5 billion in state, federal and extended unemployment benefits.
The federal government has paid for a majority of those claims, but Connecticut has spent nearly $2 billion, DOL said.
The federally borrowed money will be interest-free through the end of the year. But as of New Year’s Day, any outstanding balance will be subject to an interest rate of about 2.4%, largely because Connecticut failed to have a fully solvent unemployment trust fund in years past.
In fact, according to the federal government’s 2020 Trust Fund Solvency Report, Connecticut has not had a fully solvent unemployment trust fund since 1999, more than 20 years ago.
A ‘killer’ for businesses
The last time Connecticut borrowed money to pay unemployment claims was in 2009, during the Great Recession. The state – or rather Connecticut businesses — did not pay off that $1.2 billion debt until 2016.
Unemployment trust funds are funded through state unemployment taxes paid by employers and remitted to the federal government, which has a separate trust fund account for each state.
State unemployment taxes are assessed on the first $15,000 of each employee’s salary. The rate is determined by a company’s hiring practices.
The higher a company’s turnover, the higher the company’s unemployment tax.
Earlier this year Lamont signed an executive order so that layoffs tied to the pandemic would not impact a company’s rate.
In addition, a 6% federal payroll tax, known as the Federal Unemployment Tax Act (FUTA) tax, is levied on businesses on the first $7,000 of covered workers’ earnings. Employers remit the tax but can claim credits against 5.4 percentage points of FUTA taxes paid in states like Connecticut, effectively shrinking the FUTA tax rate to 0.6%, or a maximum of $42 per worker.
Lamont could also choose to reduce that credit, just as Connecticut’s government did after it borrowed trust fund money during the last recession.
The interest on that loan was repaid from a special assessment billed to employers, and interest on the new trust fund loan would be paid the same way.
A CT Mirror report was included in this story.
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