Federal Unemployment Compensation Debt Solution Emerges

The Ohio Senate, House, and the Kasich Administration, encouraged by the Ohio Chamber and member businesses, have reached an agreement to pay off Ohio’s remaining federal unemployment compensation debt. This will result in approximately $405 million in savings to Ohio’s employers in 2017. Legislative action will have to be taken by the end of this week to ensure the debt will be paid off.

Between 2008 and 2014, Ohio borrowed over $3 billion from the federal government to pay unemployment benefits. Because it was not paid back within the two-year grace period, it led to a penalty that increased federal unemployment tax (FUTA) on employers. Currently, Ohio still owes roughly $315 million to the federal government. Which should drop to between $225 and $240 million by this fall. Due to the debt, Ohio businesses are currently paying $147 per employee. The regular (base) FUTA rate is $42 per employee. If nothing is done, the FUTA will increase to $168 per employee in 2017.

The plan aims to pay off the debt by borrowing funds from the state equal to the amount of debt still owed to the federal government on September 30. As a result, the federal penalty will be lifted. Thus, causing the FUTA to return to the base rate of $42. In order to repay this loan, the state will tack on a one-time loan repayment surcharge to next year’s state unemployment tax bill. The surcharge will be a dollar-for-dollar amount to repay the loan, and will be spread out across all employers on a per employee basis. Based on current projections, this surcharge will be approximately $45 per employee. The loan repayment surcharge, in addition to the base FUTA of $42, would mean employers will pay about $87 per employee next year. This is nearly 50 percent less than the $168 per employee employers would pay if nothing is done and the FUTA penalty increases.

Repaying this debt will result in a huge cost savings to employers. However, it is also critical that long-term reforms are made to the unemployment compensation system to prevent this from happening again. Ohio’s unemployment compensation system has been broke and broken for over a decade. The last recession exacerbated the problems with the fund. Such crucial reforms are contained in House Bill 394, which has been an Ohio Chamber priority since its introduction.

In an effort to ensure HB 394 is enacted, the plan to pay off the debt also has two other provisions. First, throughout the time that Ohio has had an outstanding debt to the federal government, the state has paid around $250 million in interest on the loan. Therefore, the agreement would impose a state surcharge on employers to pay the interest on any loans should the state have to borrow to pay benefits in the future. Second, the state would impose another surcharge on employers as soon as the state begins borrowing, in order to help pay benefits, repay the loan, and hopefully prevent the drastic FUTA penalties we have seen over the last five years. Conceptually, the hope is that with this second surcharge we can pay off any loan within the two-year grace period. However, this state surcharge would cease if the loan has not been paid off in two years and the FUTA penalties would kick in, ensuring employers are not paying both a higher FUTA and a state surcharge at the same time.

Paying off the federal debt would be a significant victory for employers. However, HB 394 is also needed to prevent history from repeating itself. Paying off the debt without the structural changes proposed in HB 394 just kicks the can down the road. Without change the next economic downturn will put Ohio’s trust fund in the same position—having to borrow from the federal government and potentially causing higher federal taxes on Ohio employers. We need you to urge your legislator to address both of these problems:  the short-term debt fix and the long-term solvency package contained in HB 394. Click here to take action and contact your lawmakers now.

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