Insolvency Looms For Connecticut’s Unemployment Fund Without Emergency Bailout

Is it time for Connecticut’s Democratic Gov. to start sucking up to President Trump?

While investors somehow find solace in the ongoing negotiations between the White House and the Democrats (in case you actually believed that Friday’s ‘deadline’ was actually a hard deadline, well, it wasn’t), a report in the Connecticut Mirror hints at something we suspect markets haven’t entirely priced in – at least not yet.

The Connecticut Mirror’s Keith Phaneuf, an experienced chronicler of the state budget, drew attention to an imminent problem that could leave hundreds of thousands of nutmeggers blindsided when the reserve of money earmarked for unemployment benefits suddenly runs dry.

Phaneuf’s report about Connecticut’s predicament might help some understand where Nancy Pelosi and Chuck Schumer are coming from. As many blue states focused on trying to shore up funding for their pension obligations, preparations for another economic downturn were lacking.

Of course, as Phaneuf readily points out, American states are allowed to exhaust their emergency funds, and it sometimes happens during a recession. However, when this happens, the state must borrow from the federal government’s unemployment reserve fund, which charges interest in the form of a surtax born by state businesses.

While the Trump Administration hasn’t yet wielded it as such, the fact that states are effectively at the whim of the federal government when they need to borrow like this, is a powerful bargaining chip, and might offer a hint at why Trump has continued to hold out.

But if nothing else, this is just one more example of how state budget troubles might redound on the real economy. Connecticut’s unemployment trust fund is headed for insolvency by the end of the month, or possibly early next month.

Having received an unprecedented, 750,000 applications for unemployment benefits since mid-March, the state agency has paid out about $4.4 billion in benefits to date. Roughly $1.6 billion has involved state benefits, drawn from Connecticut’s unemployment compensation trust, and more than $2.8 billion in various forms of enhanced federal aid via grants from Washington.

As of Monday, about $118 million remains in the state trust, but between $250 million and $350 million will be needed monthly between now and the beginning of next month to extend benefits for the jobless.

Here’s more from the Connecticut Mirror.

“Right now our primary focus is getting our customers, both the unemployed workers and the businesses, through the pandemic,” Deputy Labor Commissioner Daryle Dudzinski told the CT Mirror.

Restaurants, tourism, and other seasonal industries will be the hardest hit by this, lumping even more injury on to their plate.

Unless other provisions are made, businesses in Connecticut would face a higher unemployment assessment from the federal government to repay the principal on any state borrowing. Local businesses also would face a higher state assessment to cover interest costs on these emergency loans.

Connecticut businesses already pay unemployment assessment rates ranging from 1.9% to 6.8% of taxable payroll – the first $15,000 earned annually by each employee – to support the state trust.

Businesses with large numbers of seasonal staff and others routinely laid off for various reasons tend to pay higher rates. Those that traditionally have few layoffs – and whose workers are least likely to draw unemployment benefits – pay the lower rates.

States that want to blunt the burden on businesses have an alternative: Connecticut has used its $1.38 billion federal Coronavirus Relief Fund grant to support COVID-19 testing, buy PPE and help subsidize state health-care providers to make access more readily available, and help towns and cities recoup costs. Some states have shifted their grant money from FEMA and other federal sources to their unemployment funds, in a legally questionable move that has nevertheless been widely allowed.

But ultimately, there’s only one long-term solution: Connecticut will eventually need to reexamine its requirements governing who can receive benefits. Right now, people earning less than $1,000 a year can still qualify.

The state could save billions, and help replenish the fund more quickly, if that rate was raised to just $3,000.

Whether Connecticut uses its resources to bolster the unemployment trust or not, CBIA also called this week for state officials to reconsider many of these rules, arguing that reforms now could help stabilize the program over the long-term.

These include raising the minimum earnings threshold to qualify for benefits. Currently, any worker earning $600 or more per year can receive unemployment. Most states, Gjede said, set a limit of $3,000 or more.

Connecticut also does not require laid-off workers, in some cases, to exhaust their severance pay before seeking unemployment.

And unemployment benefits currently are calculated based on the worker’s two-highest-earning quarters of the calendar year prior to being paid off. CBIA says it should be reflect at least three quarters, noting that season staff who only work half a year – and normally are unemployed the rest – currently take advantage of this rule and earn the same benefit as a worker paid at the same rate, but who works a full year.

Gjede said these changes have been raised by legislative committees in recent years, but none have gone for a vote before the full House or Senate.

“We could be in a better position for the next [recession] if we made just a few of these simple changes,” he added.

It’s almost as if the GOP and the White House has a point when it says we need to limit the scope of benefits to ensure we don’t unfairly subsidize blue states. Meanwhile, as Gov Andrew Cuomo takes a political swipe at the president, the governor warned that Trump’s EO won’t help dig the state of New York out of its fiscal hole.

But will it help the people dig themselves out of their financial holes?