You have probably heard by now that the fund out of which Vermont’s unemployment insurance benefits are paid is facing a financial challenge. On this web page you will find a brief primer on how unemployment insurance works, how we arrived at today’s difficulties and what can be done to solve the problem. The important thing to remember through this discussion is that Unemployment Benefits will continue to be paid.
What’s being done about Vermont’s declining trust fund?
While the Vermont Department of Labor has been working on this issue for several years, legislative action was not taken until the 2009 Special Session, at which time Act 2 of the Special Session included 3 steps towards resolution:
1. Freezing the maximum unemployment weekly benefit amount at $425.00 until June 30, 2010;
2. Increasing the taxable wage base to $10,000.00 beginning January 1, 2010; and
3. Forming an Unemployment Trust Fund Study committee to study.
The Trust Fund Study Committee will undertake a comprehensive study of all issues that affect the solvency of the Vermont unemployment trust fund and develop recommendations for reforms to the fund to reestablish and to assure its long-term solvency, including negative balance, seasonal, and reimbursable employers, taxable wage base and the rates that are applied to those bases, benefit levels, and any other relevant issues. A written report on the committee’s findings and recommendations to regain and retain solvency of trust fund is due on or before January 15, 2010.
Further information about the Trust Fund Study Committee and related documents/links are available in the right hand pane on this page.
So what’s the problem?
For several years now, Vermont has been paying more out of the UI trust fund in benefits then it has been collecting in taxes. For example in 2008 Vermont paid $112.3 million in unemployment benefits while collecting contributions of $64.5 million. Clearly this is not sustainable. In our current period of recession and high unemployment, the situation is getting worse. We estimate that Vermont’s UI trust fund will be exhausted by early 2010.
By current Vermont law, benefit payments increase each year indexed to the rise in average wages, however we can only assess UI taxes on the first $8,000 of an employee’s wages. In the early 1980’s when this taxable wage base was established, $8,000 represented approximately half the average wage in the Vermont. Currently, the taxable wage base is less than a quarter of the average Vermont wage. In summary, benefits continue to climb while we have reached our capacity to raise contributions under current law.
Background Information:
What is unemployment and how do we pay for it?
Begun in 1935 during the Roosevelt era, unemployment insurance and unemployment benefits are designed to accomplish three vital goals in our labor markets:
1) To provide partial wage replacement to workers who find themselves out of work as a bridge from one job to another.
2) To provide economic stability for a community when major unemployment occurs by supporting workers ability to continue to spend.
3) To encourage workers to remain in the community and to be available for work recalls by employers.
Unemployment Insurance is paid for in two ways.
1) States maintain an UI trust fund with the US Treasury that is paid for by employers as a payroll tax. Regular unemployment benefits are paid to unemployed workers out of this fund. In Vermont, a state tax (SUTA) is paid on the first $8,000 in wages paid to each employee. This money is deposited in an account in the US Treasury and can only be used to pay benefits. The actual tax rate a business is charged depends on that businesses’ experience rating, i.e. their history of employment and charges due to layoffs. If you cost the UI system less, you pay less.
Vermont has ability to determine how UI taxes are collected, the tax rates and the amount of an employee’s wages that are subject to the tax. Changes in these factors can only be made by the Legislature as a change in State Law.
2) The Federal Government also charges an Unemployment Tax (FUTA) on businesses to pay for national and state administrative costs and to pay for federally mandated extended unemployment benefits when they occur. Some of the FUTA tax is also put aside for states to borrow when they need more money. The FUTA tax is paid on the first $7,000 of wages paid to each employee. Under normal circumstances all but a small portion of the FUTA tax is credited back to businesses.
Need more information?
To help you better understand this situation, we have provided two documents under “Related Links” on the right hand side of this page.
The “UI Brief” link provides information that was presented during the 2009 legislative session:
· Overview detailing the need for reform
· Trust Fund Projections
· What are the consequences of not reforming
· Information on how the fund got into the position
· Details on how Vermont compares to other states
· Tax Table
· Proposed solution
The “Learn more about UI” outlines basic information about unemployment related to:
- The purpose of UI
- Governing laws
- What determines if a worker is covered
- How UI is financed
- How eligibility for benefits is determined
Updated: August 06, 2009