|
Who is to Blame for the Unemployment Insurance Shortfall?
As reported on The Nerve, the S.C. Employment Security Commission (ESC) has mismanaged millions in payroll taxes, likely leaving South Carolina employers and employees on the hook for an estimated $2 billion-plus bailout of the Unemployment Insurance (UI) Trust Fund. While legislators claim the commission is to blame, the real problem is a lack of oversight by the General Assembly, as well as a flawed tax system that has failed to create jobs and prosperity for South Carolinians.
What is the Employment Security Commission?
The ESC is charged (§ 41-29) with managing the state's unemployment reserves and job placement programs. The commission is made up of three members, elected by the General Assembly, for terms of four years. The commission elects its own chair. Two divisions operate under the commission - the State Employment Service Division and the Unemployment Compensation Division. State and local advisory councils consisting of employers and employees are also supposed to advise the ESC in its work.
Who sits on the ESC?
The commission is made up of three former state legislators: Chairman J. William McLeod (1981-1988, House); Vice Chairman Rebecca Davis Richardson (1991-2003, House); and Commissioner McKinley Washington Jr. (1974-1990, House; 1991-2000, Senate). These three individuals were appointed by the General Assembly in 2004. The most recent ESC executive director, Roosevelt "Ted" Halley, retired in November 2009 after having served as director since 2002 and been employed by the ESC since 1973. The current interim executive director is Samuel R. Foster, also a former legislator (1981-1992, House). The current commissioners' terms expire in 2012.
What's wrong at the ESC?
According to a January 2010 report by the Legislative Audit Council, the ESC has mismanaged the state Unemployment Insurance Trust Fund, such that the fund currently has a $747 million liability, increasing by approximately $2 million a day. All told, bailing out the fund would cost taxpayers more than $2 billion. The Legislative Audit Council (LAC) found that in spite of knowledge since 2001 that the fund was headed toward insolvency, the ESC "did not aggressively pursue changes to benefits, or the tax structure."
Who is to blame for the UI fund shortfall?
While many states are struggling to keep their UI funds solvent, several factors have exacerbated the shortfall in South Carolina:
Lack of transparency and planning. The LAC found that the Employment Security Commission failed to notify the General Assembly of the declining trust fund balance and failed to adhere to federal guidelines regarding minimum reserves. "Under DOL guidelines, South Carolina would have needed a reserve of more than $1.6 billion," observed the audit. "Had DOL's guidance been followed, the UI trust fund would still have a significant surplus." At the start of the current recession, South Carolina's UI surplus was approximately half that of the national average of $400 million.
Lack of cost-containment measures. The LAC audit noted that South Carolina, unlike many other states, grants unemployment benefits to employees who lose their jobs due to misconduct. Benefits paid out to such employees have cost taxpayers $384 million since 2006 - more than half of the state's current UI deficit. Likewise, the system pays "job-attached" benefits to workers who are actually still employed, but temporarily laid off owing to plant maintenance and other slowdowns. The state also does not restrict benefits for seasonal workers - thus creating what, in effect, is a subsidy for the South Carolina tourism industry.
Lack of oversight by the General Assembly. Given that the Legislature is ultimately responsible for exercising oversight over the ESC, state leaders could have acted to keep the UI fund solvent. At the very least, state policymakers have known the fund was headed toward insolvency since 2008 (and likely well before that). Last session, however, negotiations to pass legislation (H 3442) that would have restructured the ESC and placed it under the governor's control faltered along party lines. One week into the 2010 session, the House passed a joint resolution (H 4303) that would temporarily expand the definitions under which employees discharged for cause may be denied benefits. (Current state law essentially extends benefits to all but those persons who voluntarily quit or are discharged for drug-related incidents.) But why has the General Assembly waited so long before attempting to mandate key reforms?
An unfair tax that penalizes successful companies: South Carolina's UI system provides yet another example of the state picking winners and losers by forcing businesses that do not use the system to subsidize firms that run negative account balances. As a result, 3 percent of firms account for 30 percent of benefit costs. Likewise, current proposals (see below) to increase the payroll tax would fall disproportionately on firms that use the system the least.
A better idea would be to proportionately increase payroll taxes on employers that take more from the fund while lowering taxes for companies that use the system less. In neighboring North Carolina and Georgia, for instance, employers that carry a positive account balance of 5 percent and 10 percent, respectively, are virtually exempt from unemployment insurance taxes. An even better option would entail the creation of portable individual unemployment accounts sustained by employer/employee contributions. If not used, such accounts could be tapped upon retirement.
Need for fundamental free market reform. At bottom, South Carolina's UI fund is insolvent because the state has failed to foster a free market system that creates jobs and prosperity for South Carolinians. Throughout the recession, South Carolina's unemployment rate has far exceeded the national average. But this is consistent with recent trends. The state's 10-year average unemployment rate likewise exceeded the national average by 10 percent. As identified in Unleashing Capitalism, the real problem is high government spending, an uncompetitive tax code and government-driven economic development policies.
What are other states doing?
Twenty-six states, along with the U.S. Virgin Islands, currently owe a cumulative $30 billion to the federal government for UI shortfalls. Nine other states are at risk for default within the next six months. By 2012, 40 states are expected to owe $90 billion in loans. Several states have raised taxes in order to bolster declining unemployment insurance fund levels. This has primarily come in the form of increasing the taxable wage base from the federal minimum of $7,000. A better option, suggested above, would be to increase the penalty rate for employers that run a negative reserve - while cutting the minimum rate to 0 percent for employers that have a positive reserve. Currently, South Carolina's maximum rate is 6.10 percent. The state's minimum rate of 1.24 percent is 35th highest in the nation.
What's next?
In a word, substantial tax increases for employers - and, as a result, likely wage cuts and job losses for employees. If the state does not pay back its federal loan, due September 30, 2011, employers will see an automatic 0.3 percent tax increase (via the loss of a federal tax credit) - with the tax hikes growing larger the longer the money is owed. Beginning in 2011, the state will also have to begin paying interest at a rate of 4.6 percent on the federal loans.
An ad hoc commission led by Board of Economic Advisors Chairman John Rainey has called for a "temporary" 1 percent tax increase - ranging between $249.20 and $567 per year per employee - to bail out the fund. This is in addition to doubling the tax on the wage base. Such tax increases would be a mistake. South Carolina's average tax on total wages is already 25 percent higher than the regional average (0.50 percent compared to 0.40 percent). According to the Tax Foundation's UI Tax Index Ranking, South Carolina also ranks in the bottom 10 of states, with a rate 62 percent higher than that of the top 10 states, which include Florida, Mississippi, North Carolina and Louisiana. Likewise, a payroll tax increase (especially during a recession) will cost even more jobs, increasing unemployment claims even further. The best option is to lower taxes for firms that don't use the system, as well as create individual unemployment accounts that provide a real incentive for the unemployed to get back to work. Finally, placing the ESC under the governor's authority - as is done in most other Southeastern states - would bring more transparency and accountability.
|
News & Events 
