Time to Reform the Florida Unemployment Compensation Program

Premium rates for unemployment compensation (UC) charged to employers in Florida have risen over twenty fold in less than 10 years, and are predicted to double again next year. In an attempt to address this rapid increase the Florida Legislature is considering reducing benefits and making claims for benefits more difficult, in spite of the fact that the state currently has one of the lowest benefit schedules in the country. An examination of the current Florida UC system reveals that, although it has remained solvent for over 70 years, until now, it is not really a proper insurance program with adequate reserves to meet economic hard times. It is a system that is perversely designed to have low rates in good economic times and high rates in difficult times, when employers are most stretched and workers most needy.
Unemployment compensation (UC) is a joint federal and state administered program that provides benefits to eligible workers who become unemployed through no-fault of their own. Benefits are provided at no cost to the workers. The state charges employers a premium on the payroll tax to fund benefits, and the IRS collects a federal payroll tax (FUTA) used to provide grants to the states to fund administration of their UC programs. Florida’s UC program was created by the Legislature in 1937 as part of the national unemployment insurance system. The Agency for Workforce Innovation (AWI) is the state agency currently responsible for administering Florida’s UC laws.
The national unemployment insurance system was established during the Great Depression of the 1930s. It was authorized by both the Social Security Act of 1935 and the Wagner-Peyser Act. The unemployment insurance system’s primary objectives are: (1) to give workers temporary and partial insurance against income loss resulting from unemployment; and (2) to assist the countercyclical stabilization of the economy during recessions by maintaining workers’ purchasing power. Thereby supporting economic stability for employers who depend on consumer spending to stay in business; it is estimated that every $1 in UC benefits generates $1.63 in economic activity.
Normally, qualified Florida claimants may receive UC benefits equal to 25 percent of their wages, not to exceed $7,150 in a benefit year with benefits ranging from a minimum weekly benefit of $32 to a maximum of $275 for up to 26 weeks (currently extended up to 99 weeks by federal emergency legislation), depending on the claimant’s length of prior employment and wages earned. UC benefits are determined upon certain eligibility requirements, including: claimant’s earnings, the manner in which the claimant became unemployed, and the claimant’s efforts to find new employment. An employee may be disqualified from receiving UC benefits for:
• Voluntarily leaving work without good cause, or
• Being discharged for misconduct connected with the work.
(The term good cause includes only that cause attributable to the employer or illness or disability of the employee requiring separation from work.)

An employee may also be disqualified from receiving UC benefits for failing to:
• apply for, or accept suitable work when offered;
• return to suitable self-employment when directed to do so;
• receiving remuneration in the form of wages, for temporary total disability or permanent total disability under the workers’ compensation law;
• involvement in an active labor dispute which is responsible for the individual’s unemployment;
• receiving unemployment compensation from another state;
• making false representations in filing for benefits;
• illegal immigration status;
• receiving benefits from a retirement, pension, or annuity program with certain exceptions;
• termination from employment for a crime punishable by imprisonment,
• any dishonest act in connection with his or her work;
• loss of employment from a leasing company or a temporary help firm if the individual fails to contact the firm for reassignment; and
• discharge from employment due to drug use.

Florida sets the state tax structure for the taxable wage base and rate, and funds collected are paid into the UC Trust Fund, which is maintained at the U.S. Treasury. The IRS charges each employer a federal unemployment tax of 6.2 % on each employee’s annual wages. If, however, a state program meets the federal requirements and has no delinquent federal loans, employers are eligible for up to a 5.4% tax credit, making the net federal tax rate 0.8%. To receive the maximum federal tax credit, Florida has established a taxable wage base for state UC taxes at least equal to the federal taxable wage base – currently $7,000. Employers pay taxes on each employee’s annual wages for both the Federal and Florida UC taxes.
At the rate of 5.4%, the cost is $378 per employee on the first $7,000 of taxable wages; and at a tax rate of 0.1%, the cost is $7 per employee. In 2009 about 74 percent of Florida employers were taxed at the lowest experience factor (average tax rate 0.12 %); at this rate, the cost is $8.40 per employee on the first $7,000 of taxable wages.) The adjustment in the tax rate is determined by calculating several factors: the most significant factor is the benefit ratio in determining the tax rate, and it is the factor over which the employer has control. It is referred to as experience rating; because an employer’s tax rate is based on its experience of terminating workers. The benefit ratio is calculated by dividing the total UC benefits charged to the employer’s record during the preceding 3 years by the amount of the employer’s payroll during the same 3-year period. Employers who lay off the most workers are charged the highest tax rates. The purpose of experience rating under Florida’s UC law is to ensure that employers with higher UC costs pay a higher tax rate.

When a former employee receives UC based on the wages an employer paid the worker, benefit charges are assigned to that employer’s account. The account of each employer who paid an individual $100 or more during the period of a claim is subject to being charged a proportionate share of the compensation paid to the individual. However, an employer can obtain relief from benefit charges by responding to notification of a claim with information concerning the reason for the individual’s separation from work or refusal to work. In general, an employer can earn a lower tax rate by limiting the amount of benefit charges to the employer’s account.
Until now, the Florida UC Trust Fund had never become insolvent. Even in the aftermath of the 1973-1975 Recession, when the state anticipated the UC Trust Fund’s reserves would be insufficient to pay benefits, the state twice borrowed funds from the federal government – $10 million in 1976 and $32 million in 1977. However, Florida’s trust fund remained solvent and the loans were never drawn down. With these exceptions in 1976 and 1977, Florida had never sought a federal loan, making it one of only a few to avoid serious and chronic problems with trust fund insolvency. However, due to the current economic climate and increased demand on the Trust Fund, the Fund fell into a deficit in 2009. Consequently the federal government has advanced almost two billion dollars to the Fund to continue UC benefits. Repayment of the principal amount of the advance will be made from a portion of state UC taxes collected from employers. However, the interest due on advances cannot be paid from funds from the UC Trust Fund. In order to repay the interest, a state may make an appropriation from general revenue, or impose a surcharge on employers. The State of Florida Financial Outlook Fiscal Year 2010-11 through 2012-13, included payments from the General Revenue Fund of $126.9 million in FY 2011-2012 and $199.4 million in FY 2012-2013 to cover the interest costs.

Because Florida has operated its UC program in a “pay as you go approach” tax calculation method, especially with the benefit ratio feature, in which taxes increase rapidly after a surge in benefit costs, it is not truly a proper insurance program designed with adequate reserves. Consequently when economic conditions resulted in abnormally high unemployment accompanied by high and persistent benefit charges it caused a severe drain on the UC Trust Fund. The effect is perverse and contrary to the desired result because it triggers increases in UC tax rates for all employers at a time when just the opposite effect is desired. Conversely, when unemployment is low and employers are enjoying strong economic results, the negative fund balance adjustment factor triggers reductions in tax rates for employers.
Florida has been able to operate in this environment for thirty five years, because the employment rate of low wage jobs remained high and the benefits cap remained low. But its unemployment “Katrina” arrived in 2009 and there were not adequate reserves to hold back the deluge of claims. In order to address the substantial underfunded status of the program currently:
1. The state should impose a short-term surcharge on wages above the current maximum by raising it from $7000, currently scheduled for $8500, to $15000 (roughly the current annual minimum wage in Florida) for the next three years.
2. Require employees earning at least five times the minimum wage to contribute to the UC program based on an experience rating of their work history.
3. Allow a quarterly payment plan that lets employers spread out their unemployment compensation payments over the whole year without penalties or interest.
4. Provide that interest on federal loans be paid through general revenue or any other source that is not an assessment on Florida employers
Employers will complain that this increase will have a negative incentive for hiring of new employees, which is no doubt the case. Highly paid employees will complain that they are being asked to pay new taxes. However by spreading a portion of the added costs over an expanded tax base it will relieve the impact on hard pressed employers. Employees with stable work histories should benefit from very low premium rates and it would also provide some breathing room to truly address the flawed funding assumptions in the current UC program.