Even as the economy recovers, State UI trust funds remain in tough shape

June 16, 2014

Even as the economy recovers, State UI trust funds remain in tough shape

A severe side effect of the Great Recession was the depletion of state unemployment trust funds that finance jobless benefits. As unemployment skyrocketed following the crash of the housing market, many states were unable to keep up, according to Pew Charitable Trusts. To continue paying unemployment insurance claims, states were forced to borrow from the federal government.

Pew reports the collective debt reached $47 billion in 2011, and currently, 12 states still owe $14 billion to the federal government. While some states have satisfied their obligations to the fed, they did so through the private bond market and will still have debt to pay.

California has been hit particularly hard, and as of March 31, the state still has $9.8 billion in debt. A handful of other states still owe more than $1 billion each. Some states that were able to weather the financial downturn have since replenished their funding levels. However, each year a state with outstanding debt fails to pay back a sufficient amount of the loan, employers in that state lose federal tax credits.

While the reduction of federal tax credits is one of the most noticeable impacts on employers, state funds have also become less predictable. All states have handled their debt a little differently, and some even have automatic tax increases for employers that kick in at the state level when funding drops below a certain point. The volatility of unemployment costs for employers is as dependent on the state they reside in as it is the overall health of the economy.

All states are potentially at risk for UI funding issues
The downturn has also impacted those who have lost their jobs, as some states have been forced to reduce unemployment benefits so their trust funds can recover. However, according to Pew, the most troubling aspect about the current situation is that many states have not been able to restore funds to a level that would prepare them for another economic downturn. This could be troubling news for both employers and the jobless if another recession strikes.

Even states that are currently in good standing and have positive fund balances may not be able to handle another large round of layoffs following a market crash. Pew reported that nearly every state has at one time or another borrowed from the federal government to cover UI costs in the last half-century.

Nonprofit employers have a way out of state trust funds
Nonprofit organizations are not responsible for paying the federal unemployment tax (FUTA), so they are immune from the increased costs that come with reduced tax credits in states with outstanding debt. However, nonprofits and governmental organizations do need to pay into state unemployment insurance (SUTA) tax pools. What many are not aware of is that they have other options for satisfying their unemployment insurance (UI) obligations.

Governmental organizations and 501(c)(3) entities can opt out of SUTA tax pools and become reimbursing employers. Under this designation, nonprofits are responsible only for the actual amount paid out to former employees as unemployment insurance. An organization with no UI claims filed against it would have no costs for the year. This allows 501(c)(3) organizations to take their UI costs entirely into their own hands. The volatility of the state trust fund would have no impact on their UI obligation.

However, even for reimbursing employers, UI expenses can suddenly increase if unemployment at the organization spikes. Without the backing of the state trust fund, a nonprofit can find itself saddled with a large UI bill and not enough reserve funds to cover the balance. This is why reimbursing employers should look for a nonprofit UI specialist that can help them prepare for unemployment increases.

UI savings programs
To mitigate the risks that come with self-insuring, nonprofits need to take advantage of alternative methods for meeting their obligation. Joining an unemployment savings program or a bonded service program are two ways nonprofits can build a reserve. Unlike SUI tax pools, organizations make equal payments into these programs each quarter. The fund balance belongs to the organization and can be carried on the books as an asset.

Organizations that seek assistance from nonprofit financial experts such as First Nonprofit Group can obtain the largest cost savings with the smallest amount of risk. Nonprofits will find that when they control UI costs as reimbursing employers, they also have an easier time managing budgets and financing other programs.

With First Nonprofit Group, organizations can save up to 40 percent of their UI costs and use that money anyway they see fit. There are a number of programs available to nonprofits and a professional can help them choose the right one.

For information on how your organization can cost-effectively meet its unemployment insurance needs, contact First Nonprofit Group at FNCUI@firstnonprofit.com or visit www.firstnonprofitgroup.com.

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