Wisconsin employers vastly overpaid for unemployment costs during the Great Recession because the state wasn’t adequately prepared. And when the next big downturn comes, the state could face the same problem all over again.
The issue resurfaced when Republican Gov. Scott Walker highlighted a likely drop in what employers are required to pay into the fund covering unemployment benefits. With a $1 billion balance in the fund, legislators and state officials are pointing to it as a success.
But the state Department of Workforce Development stands by a year-old report saying the financing system has longer-term structural challenges and faces high risks in the event of another recession.
“We’ve got to be prepared, because we don’t want to be put in the same position we were 10 years ago,” said Dale Knapp, research director at Wisconsin Taxpayers Alliance.
Unemployment benefits are paid out of a state trust fund financed by employer taxes. Like many states, Wisconsin’s fund dipped into the red following the recession, falling to a $1.3 billion deficit in 2010. It quickly climbed out of that hole to a $1 billion balance thanks to an improving economy and business-friendly changes that have cut down on benefit payments and fraud.
But the ability of Wisconsin’s unemployment fund to withstand another downturn is still below what it should be, according to the U.S. Department of Labor, which ranks Wisconsin 35th among the 50 states, Washington, the Virgin Islands and Puerto Rico.
The fund has been in a rough spot for more than a decade. It was dwindling even from 2004 to 2006 when the economy was doing well.
“We heard talk from some legislators and from some state officials that it was something we need to address and we never did,” Knapp said. “And along came the recession and we were put in a real bad position.”
Had the state’s fund been in a better condition ahead of the recession in 2007, employers could have saved $369 million during that period, according to an April 2015 Department of Workforce Development financial outlook report. Instead, employers lost federal tax credits and had to cover interest payments, in addition to paying higher fund taxes. Taxpayers also had to cover $25 million in interest payments.
Yet many employers say they would rather have lower taxes when times are good and deal with an economic downturn as it happens.
“The idea that we ought to be increasing taxes on employers and just socking money away in the event that we might have a great big recession in the future _ that’s not just something that we think is good policy,” said Scott Manley, Wisconsin Manufacturers and Commerce Senior Vice President of Government Relations.
He said a survey of members shows most would rather keep their money and put it to better use than having it sit in a trust fund.
“From a business perspective, you’re not going to want to increase your taxes at all,” said Allied Construction Employers Association CEO John Topp. “That, to me, would not be the way to go.”
Knapp said the challenge with that approach is that businesses are actually better able to afford higher taxes during good times. He said the state would probably be better off having higher taxes over the entire time period.
The state could also further cut down on benefit payments to address the fund’s solvency.
Changing any policies would require legislative action, with input coming from the Unemployment Insurance Advisory Council. Department of Workforce Development spokesman John Dipko said the department hasn’t changed its position since the April 2015 report, which recommends the council review the policies and provide solutions to the governor and Legislature on how to further strengthen the trust fund.
But any major changes are unlikely to happen in the near future. Manley, who is on the advisory council, said he doesn’t think solvency is a concern right now, and Knapp said legislators likely see the billion-dollar balance and are unconcerned.
“I think it’s one of those issues where we should always be vigilant of where we’re at,” Knapp said.