You have probably heard by now the Unemployment Trust 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 to an insolvent point, and what was done to solve the problem. The important thing to remember through this discussion is that Unemployment Benefits will continue to be paid.
S.290 created Vermont's UI Reform. For further information on the 2010 reform, click here.
What was done about Vermont’s declining trust fund?
While the Vermont Department of Labor had 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 undertook a comprehensive study of all issues that affect the solvency of the Vermont unemployment trust fund and, while never finalized or published, developed recommendations for reforms to the fund to reestablish and to assure its long-term solvency.
Further information about the Trust Fund Study Committee and related documents/links are available in the right hand pane on this page.
So what is the problem?
For several years now, Vermont has been paying more out of the UI trust fund in benefits than 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, resulting in the need to begin borrowing funds from the Federal Unemployment Trust Fund in February of 2010.
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 (prior to calendar year 2010) 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 the 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 folks better understand the Trust Fund solvency issue, we provided the following two documents as well as several other documents to the UI Trust Fund Study Committee.
The “UI Proposal” 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 “UI - 101” 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: June 06, 2010