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September 13, 2024

Unemployment strained as benefits outpace funding

The dome of the Massachusetts State House from below Photo | Courtesy of Chris Lisinski, State House News Service The Massachusetts State House

Four and a half years after COVID-19 upended the state's economy, joblessness remains low, total employment has surpassed pre-pandemic levels, and the fund used to pay jobless benefits has more than $2.5 billion on hand.

But underneath those cheerful check marks, the Massachusetts unemployment system is once again tilting in the direction of major strain.

Benefit payments continue to outpace the funding for them collected from employers. Businesses could face a sizable increase in the taxes they pay for unemployment insurance within the next few years. And by the end of 2028, the account used to dole out aid could be hovering barely in the black, according to the most recent state-produced forecast.

That already-shaky outlook, experts say, is built on a couple of optimistic assumptions: that unemployment will increase only slightly for the next five years, and that Massachusetts will not owe the federal government any money after mistakenly paying $2.5 billion in jobless aid with federal, not state, dollars.

"It's gone from bad to worse, and the interesting thing about these projections is that they do not even look at the worst-case scenario," said Jon Hurst, president of the Retailers Association of Massachusetts. "There's two worst-case scenarios that are not even included in those projections."

State officials made some significant projection changes in the most recent quarterly report about the unemployment insurance trust fund, which was published in August.

Through the end of 2028, they project, Massachusetts will collect about $11.6 billion for the UI trust fund and pay out $14.3 billion in benefits.

That $2.7 billion chasm between cumulative intake and outlays is larger than the $2.05 billion gap detailed in the prior quarterly report, published in April. As a result, the forecast of how much money will be in the fund available to cover benefits at the end of each year has dwindled.

The April report estimated about $860 million in the trust fund by the end of 2028, and the August report trimmed the projected end-of-2028 balance down to $192 million -- less than one-sixteenth of the total benefit payments expected that year.

The Executive Office of Labor and Workforce Development attributed much of the change in the outlook between April and August to new data from financial services firm Moody's, whose projections are used to craft the quarterly reports.

Based on Moody's data, the April report assumed the statewide unemployment rate would hold around 3.4 percent from 2025 through 2028. The August forecast incorporates newer Moody's projections for an economic "softening," pushing the unemployment rate forecast in out years as high as 3.77 percent.

With more Bay Staters out of work, the thinking goes, the system will need to pay out more in jobless benefits, and thus the gap between revenues and spending grows.

Benefit payments are also indexed to wage growth annually, while employer contributions are not, an official said, further increasing the gap between revenue and expenses.

There's no guarantee the quarterly report estimates will hold true, especially given how difficult it can be to predict half a decade's worth of economic contours. But to some experts, that volatility is itself a reflection of the problem.

If increasing the forecast unemployment rate by one-third of a percentage point carries hundreds of millions of dollars in UI implications, a more pronounced downturn or recession could amplify the strain even more.

"If you're offering me a bet, I will absolutely take the over on this bet every time," Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said. "The unemployment rate is vanishingly unlikely to stay below 3.75 percent for five years."

"Could it happen? Sure, but it's extremely unlikely," he added. "It would require incredible resilience on the part of the state economy and the national economy, which is right now showing weakness, not resilience. In fact, I think there's every reason to think that the unemployment rate will exceed 3.75 percent in the next six months."

It's not especially new for the state's UI fund to be facing headwinds.

The federal government tracks the health of unemployment funds in all states. One measurement officials use is called the "average high cost multiple," where a score greater than one is deemed the "minimum level for adequate state solvency going into a recession."

Massachusetts has not had an average high cost multiple of one or greater since 2000.

"We have not done a good job for decades. I can't recall the last time we were even attempting to do a good job at maintaining solvency," Horowitz said.

Businesses owe taxes on the first $15,000 in wages per employee, a level last adjusted by lawmakers in 2015. The actual amount they pay can vary based on the rate schedule, which changes in response to broader economic factors, as well as each employer's "experience rating," which is based on the business's unemployment history.

Massachusetts is today assessing UI taxes at Schedule C, the third-lowest rate. The August quarterly report estimates bumping those employer taxes up to Schedule D in 2025, then jumping two rungs to Schedule F -- the second-highest level -- for 2026 and beyond.

Bay State employers also face several more years of charges to help cover the surge of benefits paid during the COVID-19 pandemic. That crisis plummeted the state's UI system into the red and prompted Massachusetts to borrow more than $2.2 billion from the federal government to keep aid flowing.

In 2022, lawmakers and Gov. Charlie Baker approved about $2.7 billion in bonding, using the borrowed funds to pay back Washington, D.C. and deposit some extra cash into the state trust fund. Beacon Hill assigned a new assessment on businesses to cover those bonding costs, and employers will collectively pay hundreds of millions of dollars per year through 2028 under the latest forecast.

"We are monitoring economic and labor market trends for changes in economic conditions that may impact the UI Trust Fund and will take the necessary steps to address any challenges it faces in the future," Matthew Kitsos, a spokesperson for the Executive Office of Labor and Workforce Development, said in a statement. "The Healey-Driscoll Administration will continue to ensure the stability of the trust fund while maintaining benefits for impacted workers and support for employer partners."

There's another wild card, too.

In the summer of 2023, Healey administration officials said their predecessors under Baker mistakenly spent about $2.5 billion in federal money on jobless benefits the state should have funded. More than a year later, it's still not clear whether Massachusetts will need to repay some or all of that money.

An administration official said Wednesday that talks with the U.S. Department of Labor are ongoing, with a goal of minimizing impacts to the state and especially its employers.

The latest UI trust fund projections do not factor in any possible payments related to the $2.5 billion error.

If Massachusetts does wind up on the hook, it's an open question how the state could cover the charge. Some business groups are concerned that elected officials will opt to pass the costs along to employers rather than pulling from elsewhere, like the rainy day fund that has a balance of more than $8 billion.

Hurst said he finds the latest UI outlook to be "a very scary projection" and, simultaneously, "almost too rosy."

"It's scary in that it's showing huge doublings of outlays and going down to virtually no balance in the trust fund. And then it's also a little overly rosy, and it's assuming no recession and no charging to employers for the $2.5 billion COVID mistake," he said.

Depending on who you ask, the gathering clouds are somewhere between a crisis and a mere headache.

Horowitz said UI trust fund struggles are "nowhere near one of [his] biggest priorities," pointing out that federal loans provide a "backstop" to prevent benefits from ending.

For Hurst, the costs that businesses face to fund the unemployment system are a major barrier to competitiveness, which has become a buzzword for Healey and legislative Democrats in recent years.

"There needs to be a huge focus on UI reform. You can't just keep sweeping it under the rug and say that you're dealing with competitiveness," he said. "If you're ignoring UI, you're ignoring one of the biggest messages to employers, large and small, across the country."

"[There's] a lot of focus on biotech, climate tech, on and on. This has to be easily as important of a competitive issue as any of those," Hurst later added.

Just this week, a new report flagged UI costs on Massachusetts businesses as a "major outlier" compared to other states.

The average employer pays $524 per covered employee in UI taxes, which ranks 43rd in the nation, according to the Massachusetts Competitive Index Report. Florida topped the list with an average employer UI cost of $66 per covered employee.

"The most striking aspect of UI taxes in MA is the magnitude of the difference with competitor states. MA's rate is more than 7X that of FL and even 60 percent higher than in CA," the report, published by the business-backed Massachusetts Taxpayers Foundation, Mass. Competitive Partnership and UMass Amherst Donahue Institute, said.

Lawmakers in the past have intervened to temporarily freeze UI tax rates from increasing, but there's little consensus about broader changes to the system. Many business groups want the state to rein in benefits paid or eligibility criteria that are among the most generous in the nation, while labor representatives think employers should pay more into the fund.

The Legislature in 2021 tasked a commission with crafting recommendations to keep the unemployment system solvent in the long term, but the panel's work fizzled out with few concrete recommendations after members could not find much agreement.

"I don't see any consensus right now, so I don't see how you could fix this today," said Horowitz, who like Hurst was a member of the commission.

Hurst suggested that on a topic "as complex and costly as UI, you really need leadership out of the corner office," with Healey and her deputies carving a path for reforms.

After a particularly contentious stretch of House-Senate sparring and major bills stumbling, Horowitz said UI reforms will likely be slowed by "the broader lawmaking dysfunction in the state."

"This is not a simple challenge. This is a complex problem that requires negotiations and compromise, and we as a state have not proved ourselves particularly adept at that in the last couple of years," he said. "I think a solution to this would be really welcome, but pretty novel to the current context of lawmaking."

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