News Story

COVID Shutdowns Weakened State Unemployment Fund

Account balances on the brink, and a cash infusion means another hit to employers

Michigan’s unemployment insurance trust fund is teetering on the brink of insolvency after nearly a year of exploding claim numbers related to state-ordered business closures in response to the COVID-19 pandemic.

State officials project the state fund, financed entirely by a tax on employers, will have sufficient cash to cover claims only through the first quarter of 2021.

This could force the state to seek federal loans to prop it up thereafter, said Michigan Chamber of Commerce Vice President Wendy Block, which would trigger punishing new levies on employers already struggling to stay afloat.

The situation could be made worse if state lawmakers approve a proposal, introduced last month, to permanently extend unemployment benefit payments from 20 to 26 weeks, Block said.

“Where is the money to do that?” Block asked. “How can we do that when there is no money in the trust fund. We should be concentrating on measures to get people back to work.”

Employers were already hit Jan. 1 by a state law provision that increased the amount they must pay into the unemployment payments. (This been levied against the first $9,000 of an employee’s wages; now it’s against the first $9,500).

Ironically, before the pandemic and government-ordered shutdowns, Michigan had recently emerged from an unemployment funding crisis that lasted nearly two decades.

Throughout most of the first decade of the 21st century, the state’s high unemployment rates resulted in negative balances in the benefits trust fund and repeated federal borrowing.

The 2008-09 recession made the situation worse.

In 2012, several reforms to the system were enacted. These included reducing eligibility for benefits from 26 weeks to 20 weeks and borrowing $3.5 billion to pay off the debt to the federal government. Gov. Gretchen Whitmer announced in Dec. 2019 that the debt had been retired, which also ended “insolvency tax” levies of $65-$217 per employee that employers previously had to pay.

By January 2020, the balance in Michigan’s unemployment trust fund contained one of the most robust balances in the nation, at over $4.5 billion.

Then came COVID, massive shutdowns and an estimated 4.3 million unemployment claims submitted during the year.

Federal COVID relief funds covered much of the system’s skyrocketing costs. But by December, the trust fund balance dipped under $750 million.

Block said state officials should be wary of repeating the experience from Michigan’s “lost decade” and the recession that followed.

“Once you start borrowing (to pay benefits) the situation can snowball very quickly,” she said.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.