Ohio's Unemployment Compensation Insurance Trust Fund is nearly $3 billion in debt, but state leaders don't want to face the painful solutions.

As the Great Recession pushed hundreds of thousands of Ohioans out of jobs and onto the unemployment rolls, the payroll taxes that fund unemployment benefits couldn't begin to keep up. In January 2009, Ohio began borrowing from the federal government to keep the Unemployment Compensation Insurance (UC) Trust Fund afloat. The debt totaled $2.3 billion through June 2010, according to the U.S. Department of Labor. It's projected to reach $3 billion by 2011.

The trust fund is awash in red ink. But if you think state officials are working night and day to pay off that humongous debt and restore Ohio's unemployment fund to solvency, think again. So far, no one has even developed a plan to fix the trust fund, let alone actually done something. Not Gov. Ted Strickland. Not the Democrats or the Republicans in the Ohio General Assembly. And, so far, not the state's Unemployment Compensation Advisory Council (UCAC).

Instead of taking action, or even recommending action, all the major players-government, business and labor-are trying to toss the problem to the other players. Meanwhile, hundreds of millions of dollars in unemployment compensation payments continue to flow to Ohio's jobless workers, and the state's trust fund plunges deeper and deeper into the hole.

The Unemployment Compensation Advisory Council is responsible for developing and presenting recommendations to legislators, the governor and the Ohio Department of Job and Family Services (ODJFS), whose Office of Unemployment Compensation administers the UC program. But the UCAC's members don't want to struggle through contentious negotiations unless they're certain that Strickland and Ohio legislators will take their recommendations seriously.

"We are looking for some type of ‘push' from the governor's office or legislative leadership," says UCAC co-chairman Andrew Doehrel in an e-mail. "Doubtful the council would say ‘here is the solution' without that interest."

Doehrel's also president and CEO of the Ohio Chamber of Commerce, and there's no indication his business constituents are pushing him to take a leadership role in solving the shortfall. After all, that might mean ... more taxes. By the same token, neither nervous workers nor the jobless are pushing labor leaders to weaken the unemployment safety net by freezing or cutting benefits.

How about Strickland? Will he step up and actually ... govern? Not so much. The governor says he wants a plan from the UCAC in hand before acting, knowing full well that the UCAC has no plan to make a plan. State legislators are hiding in their foxholes, too, even though the Ohio House of Representatives and the Ohio Senate ultimately must pass legislation to authorize any UC trust fund changes.

Political courage, it seems, is in woefully short supply in Ohio these days. Perhaps that shouldn't be surprising, since everyone knows any solution to the unemployment comp deficit will be painful and unpopular, involving higher taxes, lower benefits or both.

But the state's leaders are playing a dangerous game. The more they kick the can down the road, the closer comes the day of reckoning, when the federal government will drop a heavy hammer on Ohio's employers in the form of higher federal unemployment taxes. One way or another, the UC trust fund's debt to Uncle Sam will be repaid.

By the Numbers

In Ohio, the unemployment rate in June 2010 was 10.5 percent (625,000 Ohioans), 1 percent higher than the national rate, but down from this recession's peak of 11.2 percent in July 2009.

Eligible Ohioans may receive 26 weeks of regular state-funded unemployment benefits, plus up to 73 additional weeks of federal benefits, for a combined total of 99 weeks of state and federal payments. Already there are cadres of long-term unemployed workers-they call themselves "ninety-niners"-who have exhausted both their state and federal benefits. The U.S. Bureau of Labor Statistics reports 45 percent of the jobless have been out of work for more than six months.

Through June 2010, Ohioans had received $1.25 billion in unemployment benefits, down from the $1.78 billion paid during the first six months of 2009. "We're paying out benefits at a slower pace. Things have been looking dismal, but they're starting to turn slowly," says Bruce Madson, ODJFS deputy chief of staff of workforce solutions.

Employers fund Ohio's UC Trust Fund through state payroll taxes, known as contributions, on the first $9,000 of each employee's wages. That threshold is known as the UC taxable wage base. The state UC tax rate can range from 0.5 percent to 9.4 percent, depending on the firm's industry and layoff history. Make a late UC payment and the rate can go as high as 11.8 percent. On average, Ohio's 2010 unemployment payroll tax is $297 per employee.

Additionally, Ohio employers pay a federal UC payroll tax that's 6.2 percent of the first $7,000 of each employee's wages. Most states, including Ohio, enjoy a 5.4 percent offset, which reduces the net tax collected under the Federal Unemployment Tax Act (FUTA) to just 0.8 percent. That's about $56 per employee annually.

It's the FUTA tax that funds extended unemployment benefits and loans to states with trust fund deficits. If the feds begin repaying Ohio's loans by raising FUTA collections in stages from 0.8 percent to the full 6.2 percent, the pain to Ohio employers will be severe.

Ohio's Loan

The UC trust fund's current financial trouble began in 2008. Employer contributions in that year slightly exceeded $1 billion, but unemployment benefits totaled almost $1.5 billion. Things got much worse in 2009, when tax collections dropped slightly while benefit payments almost doubled, to $2.9 billion. Through June 2010, unemployment benefits ($1.07 billion) have continued to outpace tax collections ($766 million).

When any state's UC trust fund runs out of money, it has no choice but to borrow from the federal government. "We must pay the benefits without interruption. People will get their unemployment checks," Madson says.

Under federal rules, Ohio must begin repaying its loan in 2011. It has two years to pay it back completely. "The feds have a hammer," Madson says. "They don't raise taxes. They reduce the FUTA credit. Usually it's a 0.3 percent reduction the first year that gradually increases, year after year. The federal government applies that to our debt. They get their money back regardless of what the state does or doesn't do."

Ohio did get a break from the American Recovery and Reinvestment Act (the federal stimulus bill), which waived 2010 interest on the federal unemployment compensation loans, saving Ohio an estimated $117 million. However, Ohio's loan is to begin accruing interest Jan. 1, 2011. An initial $110 million interest payment is due Sept. 30, 2011.

Congress might allow the 30 states whose unemployment trust funds are in hock to just walk away from the debts, but that's a long shot. "Forgiveness of the principal is unlikely" Madson says. "What is likely is some extension of the interest break. Historically that's what has been offered to states who show a good faith effort to pay back the loan. That's what's already happening in other states that were insolvent before us."

Benefits Outstrip Taxes

The current recession is only the latest blow to Ohio's unemployment compensation program. "Ohio's economy has taken some big hits," says Wayne Vroman, an economist with the Urban Institute, a nonpartisan research group in Washington, D.C. "The trust fund lost reserves every year since 2000 and never really recovered from the 2001 recession. That's caused huge strains."

One reason for the ongoing loss of reserves is that unemployment compensation benefits almost always go up, even in recessions, while unemployment payroll tax revenues can go up, down or sideways. "Ohio's unemployment benefits are indexed, meaning they're based on the state's average wage," says Madson. "Benefits can go up or down, but generally they go up. Employer taxes are not indexed, so there's a structural imbalance. We have a growing need funded by a stagnant inflow."

Ohio's unemployment recipients received an average weekly payment of $302.69 in 2008 and $321.01 in 2009. By June 2010, the average had risen to $351.11-an increase of 16 percent in just two years.

Vroman says the decline in the trust fund balance "is caused by the failure of taxes to keep up with payments, because the last time Ohio's unemployment tax changed was 1995." His research shows employers' tax contributions as a percent of payroll were 0.64 percent in 2007, nearly matching benefit payouts of 0.67 percent of payroll. In 2008, employers' tax payments remained at 0.64 percent, but benefit payouts rose to 0.88 percent. And in 2009-the depth of the recession-employers' taxes edged up to 0.67 percent, while benefit payments soared to 1.87 percent.

"You can see how unemployment benefits were more than double tax revenue in 2009, even though the flow in and out was almost in balance in 2007," Vroman says.

In 2008, Vroman recommended Ohio increase its taxable wage base to $12,000 and implement a three-year benefit freeze. "That was prior to the full severity of the downturn," Vroman says. "The changes Ohio needs now are bigger than before. If the taxable wage base was increased over several years to $11,000, then $13,000 and then $15,000 and then indexed after you reached $15,000, you'd obviously infuse more money into the revenue stream."

Policy Matters Ohio, a nonprofit policy research organization, supports tax indexing. "The tax goes up automatically with wages, so you don't have to go the General Assembly each year for an increase," says Zach Schiller, the organization's research director. "It's not a cure-all, but it needs to be done. If you don't index the taxable wage base, it doesn't accurately reflect what the indexed benefits truly cost."

Businesses take a dim view of indexing unemployment taxes. "You're asking small businesses, many operating with a razor-thin margin, to pay more taxes? In such a severe recession and economic climate like we have today, it isn't prudent. Our members tell us that loud and clear," says Chris Ferruso, legislative director for the National Federation of Independent Business in Ohio.

Ferruso notes that small businesses create two of every three jobs. "When taxes go up, it stifles job creation," he says. "The pot of money is only so big. When employers have to pay more taxes, they have that much less to keep current workers employed and hire new ones."

Doehrel says the obvious UC funding solution is usually overlooked: "The only long-term solution to the unemployment trust fund's insolvency is to create jobs. The basic question is, does Ohio have the economic climate to create jobs? If we do, the problem solves itself. That's the one focus that gets lost in the discussion."

UCAC's Inaction

Ohio's Unemployment Compensation Advisory Council, whose 12 members include legislators and representatives of both business and labor, was created in the 1980s, after the UC trust fund hit another financial snag. Since the current crisis began, however, the UCAC has done essentially nothing.

"The council requires a majority for anything to get done," says Doehrel. "It forces us to sit down and form a consensus." Consensus can be hard to find, though, in a group that equally represents business and labor, Democrats and Republicans, and the state House and Senate.

"I have basic philosophical and fundamental positions, but I do see all of us cooperating," says UCAC member and Ohio AFL-CIO Chief of Staff Tim Burga.

Maybe Burga's right, but so far the UCAC hasn't been able to get its arms around the trust fund deficit. The recession's impact has been fast-moving and unprecedented. "It changes almost daily, and we just don't know how deep the hole is," Doehrel says. "Any solution today probably won't fit the situation six months from now."

As council members struggle to assess today's solvency options, the events of 2006 still loom large. That year, the UCAC did reach consensus and recommended a $500 increase to the taxable wage base and a three-year benefits freeze, among other things. "Andy [Doehrel] gave a little, we gave a little," Burga says. "Both sides tried to move the ball forward with a good faith effort."

In the end, the ball didn't move an inch. Neither the governor nor the Ohio General Assembly had the will to tackle a politically risky issue. "Even when the UCAC reached consensus, the legislature and governor didn't act," Burga says. "That disappointed a lot of us."

The UCAC met in May to review current solvency options with Vroman. Doehrel says multiple scenarios have been sent to Strickland and General Assembly leaders for their input. But don't expect the advisory council members to stick their necks out this time.

"Should the UCAC do this again only to be ignored?" asks Doehrel rhetorically. "We're looking for leadership from the governor and the General Assembly. No one has come to me and said, ‘Solve it' or ‘We're on this. Get it done and bring us some proposals.' Everyone knows the list of choices: increase the tax rate and decrease the benefits in some combination."

State Sen. Karen Gillmor (R-Tiffin), a UCAC member, understands the problem. "When the governor is asked about the council, he says he's waiting for our proposal," Gillmor says. "My response is, ‘There's no shade at the top of the tree.' This situation should've been addressed long ago by the governor, since the trust fund has racked up $2.3 billion in debt."

Strickland says he won't lead a parade before the UCAC sends him the sheet music. "The UCAC is responsible for addressing the long-term solvency issues of the fund," says spokeswoman Amanda Wurst in an e-mail. Strickland "remains hopeful that work will continue and a comprehensive solution to deal with the fund's solvency issues will be put forward that has the endorsement of both the business and labor communities and can win bipartisan support in the legislature."

Republican gubernatorial candidate John Kasich's spokesman, Rob Nichols, in another e-mail, echoes Doehrel's assertion that only a rising tide of new jobs can lift the sunken UC trust fund. "The problems with the fund underscore the importance of fixing Ohio's economy immediately and getting Ohioans back to work to relieve some of the immense pressures that are currently put upon the program," Nichols writes.

Burga, appointed to the UCAC in July, is optimistic. "I haven't attended a meeting yet, but I know the UCAC will keep at it," he says. "It's a major issue that the stakeholders want and need to deal with in a productive way."

State Sen. Capri Cafaro (D-Hubbard), the Democratic minority leader, expects both the UCAC and the General Assembly to take action. "There's no way for us to present a solvent unemployment trust fund if we don't make changes," says Cafaro, a UCAC member. "We'll engage business and labor, and members from both sides of the aisle and both chambers in presenting something to the General Assembly. UCAC members take the job seriously and understand how important this is."

Cafaro expects legislators to take up the trust fund's insolvency after election season. After all, since they've waited this long, what's another few months? "It's too complex an issue to address in the legislative sessions we have left in this term or in a lame duck session," she says. "I suspect it will be a top priority of the next General Assembly."

Perhaps Cafaro's right, and Ohio's leaders will finally come to grips with the bankrupt unemployment trust fund in 2011. With or without UCAC recommendations, with or without legislative action, Uncle Sam's loan repayment clock is ticking.

Lisa Hooker is a freelance writer.

Reprinted from the October 2010 issue of Columbus C.E.O. Copyright © Columbus C.E.O.