Improving Unemployment Insurance Financing in New York

Last week, New York Governor Andrew Cuomo and state lawmakers reached an agreement on a $141 billion budget that makes various changes to New York State’s unemployment insurance (UI) program. The new law seeks to address an ongoing multi-billion dollar federal debt incurred to pay state UI benefits during the Great Recession and the weak recovery, and to reverse long-standing deficiencies of the state’s program, like the low maximum benefit.

The Governor deserves credit for recognizing the need for reform and for adopting more moderate changes than other states facing deep insolvency. Most recently, North Carolina lawmakers reduced the maximum length of time someone may receive state UI benefits by six weeks and the amount of the maximum check by one-third. Rare among states that are borrowing to support their UI programs, the Governor’s plan raises the maximum benefit, frozen at $405 since 2000.

Unfortunately, minor adjustments to the program’s funding raise concerns as to whether it could withstand the inevitable next recession without again sinking into the red and requiring potentially harmful benefit cuts. As background, state UI programs are funded by employer taxes. The amount New York’s employers pay depends on the portion of each worker’s paycheck subject to taxes, known as the taxable wage base, and the number of lay-offs.

The program’s taxable wage base has been held at just $8,500 since 1999. As total wages and benefits paid went up over this period, this key funding mechanism stayed flat. This meant the state’s UI program was unprepared even for a mild downturn, let alone the worst recession since the Great Depression. At its peak one year ago, New York was borrowing approximately $4.0 billion from the federal government to continue paying state benefits. Now employers are saddled with two additional bills until the debt is paid.

Fortunately, the new law increases the minimum tax for employers with the fewest layoffs. Currently, over one-third of the state’s employers pay the minimum tax worth $77 per employee, so this change raises revenue without being excessively burdensome. However, the plan fails to adequately address the problem of the low tax base, providing for an increase of just $4,500 over the next 13 years to $13,000—roughly equal to the current national average ($12,782).

In addition, the Governor’s plan raises the maximum benefit so gradually that by the time it reaches $450 in 2018, it may not replace a greater share of a claimant’s lost income than it does currently.

The Governor’s plan does allow the taxable wage base to rise automatically with wages, a process known as indexing. Of the 17 states with indexing during the recession, only 7 required federal loans compared to 29 of the 36 states without it. But this feature does not begin until 2027. That is 13 years away. In addition, the plan sets the rate at just 16 percent of average yearly wages. In the meantime, with yearly increases worth just $200 to $300 following a onetime jump next year, the tax base will likely not exceed this meager target.

It is not clear what guided the decision to settle on a 16 percent threshold, as history suggests it cannot sustain the program through a recession. The state applied UI taxes to just above this portion of average wages in 2001, while our neighbors and the U.S. taxed more than twice this amount, on average. As a result, New York has been in a period of unprecedented borrowing both during the weak recovery from the early-2000s recession and over the Great Recession.

Of the states with indexing, none sets their taxable wage base equal to less than 46 percent of state yearly wages. In 2010, then-Governor David Paterson proposed a plan that would have pegged the taxable wage base to 18 percent of yearly wages, which is where it was when it was last raised in the state, and which then was considered more politically feasible than alternative proposals. The year the federal taxable wage base was last raised, it represented over 40 percent of wages nationally. This is a standard worth aiming for.

The plan derives cost-savings by raising the amount of wages needed to qualify for UI benefits over the next three years and by cutting benefits for workers with less steady income, as if the circumstances for low-income New Yorkers who lose their jobs were not already difficult.

The Governor’s plan is an improvement over the current situation, and perhaps is the best that can be hoped for. Looking ahead, New York’s unemployed families need change that better balances benefit adequacy and sustainable financing.