Unemployment Trust Fund Solvency Threatened, Rate Hikes Likely; TDI Stable but Rates Hikes Likely

Rhode Island Public Expenditures Council

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Unemployment Trust Fund Solvency Threatened, Rate Hikes Likely; TDI Stable but Rates Hikes Likely

PROVIDENCE, RI – A new Rhode Island Public Expenditure Council report released today finds that, because of the economic crisis resulting from the COVID-19 pandemic, Rhode Island’s unemployment insurance (UI) trust fund is projected to be insolvent by the end of September. As a result, employers are likely to pay significantly more in federal and state unemployment insurance taxes in 2021. The report, “The Impacts of the COVID-19 Crisis on Rhode Island’s Unemployment and Temporary Disability Insurance Programs,” is the second in a series of RIPEC reports on how COVID-19 impacts Rhode Island’s fiscal stability and economic security.

“Rhode Island is on track to borrow from the federal government to keep its unemployment insurance trust fund solvent for the second time in eleven years,” said RIPEC President and CEO Michael DiBiase.“This level of frequency should be of concern to policymakers and taxpayers, as should the fact that the temporary disability insurance withholding rate is likely going to experience its second year-over-year increase.”  

RIPEC’s report found that historically unprecedented UI participation between late March and May has significantly decreased the balance in Rhode Island’s UI trust fund. With an unemployment rate projected to remain above 15 percent throughout 2020 and into 2021, it is anticipated that Rhode Island’s trust fund will continue to hemorrhage funds. Based on RIPEC projections, it will fall into insolvency by the end of September 2020. This finding, RIPEC says, should be especially alarming to policymakers considering the fund started the calendar year with a balance of $537.9 million—the largest balance on record, even after adjusting for inflation. Even at that level, Rhode Island’s UI trust fund was considered inadequate by the U.S. Department of Labor and ranked 34th in the country in terms of trust fund solvency. 

A combination of UI trust fund insolvency and persistently high unemployment rates are likely to lead to significantly higher UI taxes for Rhode Island employers at a time when many can least afford it. Rhode Island’s UI trust fund became insolvent in 2009 during the economic fallout of the Great Recession. The state consequently had to borrow from the federal government, which led to increased federal rates for employers until Rhode Island’s fund moved into the black in 2014. To make up for losses, state UI taxes on employers also increased in this period. By 2015, the average Ocean State employer paid $302 more per employee than in 2008 (2019 dollars), a 48.1 percent increase.   

While the state’s UI trust fund nears a crisis and Rhode Island’s unemployment claims remain at or near an all-time high, claims under the Temporary Disability/Caregiver Insurance (TDI/TCI) programs have stabilized after spiking over the last two months and the TDI/TCI fund is expected to remain solvent, although employees can expect an increase in their withholding tax. High unemployment will continue to have a significant negative impact on employee contributions to the TDI/TCI fund and RIPEC’s modeling analysis projects a nearly $33 million decrease in the fund by the end of 2020 (a 39.7 percent decrease). This loss is likely to lead to an increase in the employee withholding rate, from 1.3 percent to 1.6 percent, resulting in a $150 annual tax bill increase for the state’s average mid-wage worker.   

There are options available to lessen the negative impacts of UI and TDI trust fund shortfalls in the short-term and to better prepare Rhode Island for a similar crisis in the long-term. Specifically, policymakers could consider using a portion of the state’s $1.25 billion allocation from the federal Coronavirus Relief Fund to shore up the UI and/or TDI trust fund. Once the COVID-19 crisis and economic fallout are behind us, policymakers should consider pursuing tax policies to build a larger UI trust fund. Policymakers should also consider reforming the TDI and TCI system to enable employers to opt into private or self-insurance plans and/or find opportunities for efficiencies given the program’s relatively high cost. 

RIPEC’s full report is available here.