Michigan could run out of cash within months to pay all the unemployment it has promised workers idled by the coronavirus, and businesses fear taxes may have to increase to fill the hole.
The Michigan Unemployment Trust Fund will be drained within two months and incur as much as a $15 billion deficit, predicts Christopher O’Leary, a senior economist specializing in labor markets at the Upjohn Institute in Kalamazoo.
Michigan’s jobless workers would still get their full unemployment checks. But the state would have to borrow to cover the shortfall — and potentially repay it with increased business taxes that could slow the recovery from the COVID-19 crisis.
Gov. Gretchen Whitmer acknowledged the problem in an interview with Bridge on Tuesday, but said the state has been largely preoccupied by repairing system outages and enrollment logjams from 1 million unemployment claims in the past month.
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“We’re looking at it,” Whitmer said of the unemployment shortfall. “We’re mindful of the need. The federal government is working to make sure that we’ve got the resources to meet those needs as well.”
The situation comes even though Michigan had the nation’s third-highest unemployment reserve in the nation, about $4.6 billion at the end of 2019, according to a March 31 Michigan Senate Fiscal Agency memo.
Now, state officials say a worst-case scenario calls for the fund to be drained in July, said Jason Moon, communications director for the Michigan Department of Labor and Economic Opportunity.
The federal coronavirus bailout package, the CARES Act, will grant states interest-free loans to cover unemployment shortfalls through the year-end, according to the Washington, D.C.-based Tax Foundation.
So while there’s a short-term solution to the shortfall, by next year the state’s employers may face higher unemployment taxes as they try to dig out of a likely recession caused by the virus.
In one scenario, the taxes would have to double to repay the bonds, leaving less money for businesses to rehire workers or invest in equipment after the crisis eventually passes.
“Ultimately, businesses and workers will have to pay it back,” O’Leary said
And the slowdown from the coronavirus has just begun: Nearly 1 in 4 of Michigan’s 4.76 million workers have filed for unemployment since mid-March. The University of Michigan expects a total of 1.2 million lost jobs by the second quarter, peaking in May as workers exhaust paid time off.
Job loss reversals — and workers leaving the unemployment system — won’t start until summer, according to the U-M economists, in an “optimistic” outlook. Many jobs may not be regained until the end of 2022, they forecast, signaling a years-long recovery.
“We haven’t seen the peak of this,” Jeff Donofrio, director of the Michigan Department of Labor and Economic Opportunity, said Tuesday.
By the time the pandemic hit the United States, Michigan was one of 31 states operating unemployment trusts considered solvent. Six states, including California, have fewer than 10 weeks of funding for jobless claims, the Tax Foundation reports.
At the end of March, Michigan Senate analysts concluded the unemployment fund could cover $176.7 million per week for 26 weeks and remain solvent. But Michigan’s skyrocketing claims mean the fund could now pay out $100 million more than than that per week.
And the system is facing new pressures.
In March, Whitmer extended jobless benefits from 20 to 26 weeks and added an eligibility for new classes of workers, like those in the “gig” economy. Less money is going into the system not only because businesses now have fewer employees, but because a Whitmer executive order caps the total unemployment insurance taxes assessed on employers, according to a Senate Fiscal Agency memo.
O’Leary analyzed reserves and the trajectory of unemployment claims to predict the state needs $20 billion to cover payments. The rough estimate — $15 billion more than the state has on hand — comes with many variables, O’Leary added.
Funding the unemployment trust fund can be complicated and politically charged. It is fed by payroll tax paid by employers. In 2017-18, about $1.2 billion went into Michigan’s fund.
“There’s a balancing act,” said Eric Lupher, president of the Citizens Research Council of Michigan. “It’s balancing the risks of deep recession and providing benefits, and how much money you’re taking out the economy by doing so. That’s money those businesses could be spending on capital improvement, or active labor, or other things.”
Over decades, Lupher said, Michigan has often found itself without an unemployment fund that is sufficient for manufacturing-driven economic downturns. “We have a pattern of borrowing and paying back,” he said.
In 1982, the state Legislature initiated a four-year plan to repay $2.2 billion in unemployment debt stemming from recession. That followed $624 million in borrowing in the 1970s. By August 2010, Michigan had borrowed $3.8 billion to cover unemployment payments during the Great Recession. In 2011, employers had to pay an additional $240 million into the fund.
O’Leary cautioned, “annual tax rates for contributing Michigan employers would probably double” if the state needs to seek a federal loan that isn’t covered by the interest-free provisions.
Municipal bond financing also is an option if the state needs more unemployment funding beyond this year. That option was used a decade ago, with the most recent one only recently retired.
Either way, Lupher said, tough policy decisions are coming when the pandemic passes and the state has to decide how to fund its unemployment trust to rebuild it and prepare for the next downturn.
“There is no magic solution,” he said. “People’s lives are at stake. Businesses are at stake.”
Businesses are concerned about the unemployment hangover to come. Already fixated on trying to reopen, many businesses are wondering how to rebuild if they face a higher tax burden, said Wendy Block, vice president of business advocacy at the Michigan Chamber of Commerce.
“The system is 100-percent employer financed,” Block said. “If the system goes into the red, employer taxes will need to be increased to repay that debt.”
Block said the state chamber understands Michigan’s unemployment system is overwhelmed, so it plans to lobby Michigan’s congressional delegation for more federal relief.
The current worst-case scenario is not what any unemployment system plans for, Lupher said, noting that past methods of repaying unemployment fund debts “is almost the reverse of economic development.”
“But it is what it is at this point,” he said. “We’re not going to change it in time to make a difference in this go-round.”
— Capitol reporter Jonathan Oosting contributed
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