Albany Bails Out Our Unemployment Insurance Boat. Guess What? It Still Leaks.
Urban Matters: In a move that caught most people by surprise, in finally settling the overdue New York State budget, the governor and the legislature came up with $8 billion to pay down the State’s Unemployment Insurance (UI) trust fund debt to the Federal treasury. You’ve written a lot about reforming UI financing; is this progress?
Jame Parrott: The good part of it is that paying off that debt, which up until now has been solely the responsibility of employers, will unfreeze the state’s maximum UI benefit level, which has been stuck at $504 per week since 2019. The 2019 maximum is poverty-level income and the main reason that our average UI benefits have fallen far below all of our neighboring states.
The maximum benefit will rise significantly, to more than $800 a week, which will certainly help unemployed workers and the broader state economy if President Trump’s erratic and ill-informed policies push the U.S. economy into recession.
The State’s trust fund debt to the Treasury now actually stands at about $5.8 billion – so $8 billion will pay that down and also provide a cushion of a few months if unemployment increases as expected, given Trump’s actions in destabilizing consumer and business confidence.
Now for the awful parts. This does absolutely nothing to fix the chronic insolvency of the State UI fund. We still need to shore up this essential part of our social and economic safety net. If we don’t, we’ll soon be back in a deficit situation, and small businesses will see their UI taxes rise again. And papering over the UI financial mess with public dollars just uses up funds that could well be needed to meet other, more pressing needs.
UM: Just to review how we got here: The debt we’re talking about was incurred because of the spike in unemployment that occurred during the Covid-19 pandemic recession, right?
Parrott: Pandemic unemployment levels were unprecedented, particularly in New York. Even with the Federal government providing over 80 percent of the $100 billion in UI benefits paid out in New York between April 2020 and September 2021, the state’s share was many times greater than the it had paid out during prior recessions.
But there’s an underlying problem: New York State has been chronically underfinancing UI for decades. The Federal government had been warning New York (and California, too) well before the pandemic to put their systems on a sound financial footing.
New York had to borrow from the Federal government during all three recessions over the past 30 years, in the early 1990s, the early 2000s, and during the Great Recession of 2008-09. It was clear to many of us at the time that Governor Andrew Cuomo’s 2013 financing reforms fell far short of ensuring sustainable solvency.
During the Covid recession, 38 states used Federal fiscal aid to offset drops in employer UI taxes. Arguably, New York could have used some of its pandemic Federal aid to offset employer taxes, but since we entered the pandemic with already-broken UI financing, our debt started piling up sooner than anywhere else and reached greater levels than in other states except California. Our putting up $8 billion for UI is basically covering 3.5 years of UI benefits (taking the 2023 benefit level as typical for a non-recession year).
Only three other states, all from the South (Georgia, Virginia, and Texas) and none known for their worker safety nets, used Federal funds to provide a bigger business bailout. Excluding those three states, the other 35 states used Federal aid to moderately offset some business UI taxes but not to provide a gargantuan bailout, and one divorced from any financing reform. benefits.
The real kicker is that had New York State acted sooner to pay down the debt, it could have saved employers $600 million in interest costs, an amount that would have covered three months of benefits.
UM: Given that history of warnings about the system’s shakiness, why haven’t Albany leaders fixed UI financing?
Parrott: Good question. I guess it’s probably because they never really took to heart what JFK said about going to the moon. (“We choose to go not because it’s easy, but because it’s hard.”) But, sometimes there’s a political payoff in doing what’s hard.
There was a token change on the financing side in raising the “taxable wage base” which is the portion of a worker’s wage on which employers pay UI taxes. It is currently $12,800, and under existing law would have increased to $13,000 in 2026 and then be set at 16 percent of the state’s average annual wage after that (by next year the average annual wage will be close to $100,000.) The token change was to set the taxable wage base at 18 percent rather than 16 percent. That will bring in a little more revenue but not nearly enough to ensure long-term solvency for the UI trust fund. Before long, we’ll be borrowing again. Nineteen states have a wage base $24,000 or higher, led by Washington State with a taxable wage base of $68,500. New York should have raised it to 90 or 100 percent of the average annual wage to ensure that employers of higher wage workers shoulder their share of the UI tax burden.
If we reformed UI financing along the lines of what I outlined for Urban Matters a few weeks ago, with a much higher taxable wage base and restructured tax rates to de-emphasize an antiquated notion of “experience rating,” we could ensure that large, profitable employers of predominantly high-wage workers would share more of the burden, and we could significantly lighten the UI tax burden on smaller and lower-wage employers.
Since small businesses were very vocal in calling for this bailout, one might think they would be interested in fixing a tax structure that is “rigged against them.” And, in the process we could ensure that more adequate UI benefits are financed sustainably over the long haul. Whatever you think about going to the moon, this is not rocket science.
UM: You mentioned “more pressing” New York needs earlier. What did you have in mind?
Parrott: We know Washington is on the verge of what are certain to be painful Federal budget cuts that will hurt many New Yorkers, especially those reliant on programs such as Medicaid, food stamps, school aid for low-income districts, and heating and rental assistance. In light of that, and in the context of the renewed income polarization we have seen since the onset of the pandemic, I would have thought our policy makers would want to reserve what some are construing as an unexpected revenue windfall in the first quarter of this year to protect vulnerable New Yorkers, rather than spare large corporate employers in finance, tech, and media that profited so much during the pandemic from paying a fairer share into the UI fund.
Economist James A. Parrott is a senior advisor and fellow at the Center for New York City Affairs at The New School.
Photo by: unemployment-gov.us