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The Honolulu Advertiser
Posted on: Saturday, January 2, 2010

Hawaii's unemployment fund forecast a bit less gloomy


BY Greg Wiles
Advertiser Staff Writer

There's been a slight brightening of the picture for the state's unemployment compensation fund, though employers are still facing a more than 1,000 percent jump in unemployment insurance tax rates this year.

A recalculation of rates based on a newly released jobless rate forecast shows the fund balance won't fall as much as originally expected. Because of this, the state may not have to borrow as much from the federal government to get through the next year and a half.

But the recalculation doesn't include better news for employers.

The fund balance will still dip to a point that triggers a massive increase in unemployment insurance taxes levied on employers. The average annual rate by employers will spike from $90 to $1,070.

That has the state continuing to work on modifications to unemployment fund law that will cut the amount employers will have to pay.

"Essentially we're still trying to seek a consensus from the business community so we can move forward and get quick legislative relief," said Darwin Ching, head of the state Department of Labor and Industrial Relations.

He said the state is worried some businesses won't be able to afford it or will start laying off workers.

"The bottom line is we're trying to save jobs and keep people employed," he said.

The state has been warning of the hike in unemployment taxes since September. The tax increase is needed because the fund from which unemployment benefits are paid is dwindling rapidly.

The state's highest unemployment in more than 30 years is draining the fund and, by law, a tax increase will kick in to replenish it.

The 12-fold increase means a company with 10 employees would see their annual unemployment tax bill jump from $900 to $10,700.

The rates are based in part on an employer's history of using the unemployment fund. Companies who have many people going on unemployment must pay the highest rates.

FUND WILL RUN OUT IN 2011

The recent recalculation was made after new unemployment forecasts were released from the University of Hawai'i Economic Research Organization.

Those forecasts said the 2010 average unemployment rate will be 7.3 percent instead of the 8.1 percent it had been forecasting. The group also lowered its jobless forecasts for 2011 and 2012.

That means the compensation fund won't run out of money as fast as originally thought, but it isn't significant enough of a change to affect projected employer rates and the taxable wage base used in calculating employer taxes.

The unemployment fund had $430 million at the end of 2008 but had been projected to run out of money late this year, when it would end December $15 million in the red.

After that, the state would have to borrow money from the federal government to meet unemployment benefit payments.

But according to the newest unemployment forecasts, the fund will run out of money in the first three months of 2011, when it will end up $13.3 million in the red.

The state is worried about employers shedding workers to deal with the higher unemployment bill, and thus adding to the state's jobless rate and increasing the amount of unemployment benefits paid out.

"It's still a big raise in taxes for employers," said state labor department spokesman Ryan Markham, adding that the department is working with the governor's office on ideas to mitigate the increase.

"It's going to be burdensome. We just don't want to make it tremendously burdensome."

At the Chamber of Commerce of Hawaii, work is being done on analyzing the potential impact of the full tax hike and coming up with alternatives.

"This is our top priority by far," said Jim Tollefson, chamber president. "The impact is going to be material on the business community and now is not the right time to impact the business community."

DELAYING TAX INCREASE

There are many variables that can be adjusted to bring down unemployment costs, including which tax rate is used from among eight in the Hawai'i law, projected unemployment rates, and how much is paid out in benefits.

Rep. Karl Rhoads, D-28th (Pālama, Downtown, Lower Makiki), who chairs the House Committee on Labor and Public Employment, is looking at ways to delay some of the replenishment of the unemployment fund for a couple of years until the state's economy can get back on its feet. His proposal doesn't call for cutting unemployment benefits or their duration.

Instead, Rhoads is proposing a lower tax rate for 2010 and 2011, with most rebuilding of the fund to come later. Under his proposal, employers would find some relief next year and in 2011 compared to what the current law calls for. Rather than being charged $1,070 annually per worker, employers would pay $630.

"It takes the average from $90 (now) to $630, which is still a significant increase," Rhoads said.

In 2011, the rate would be $1,290 instead of the $1,520 currently called for under the law.

Another proposal being mulled by the Chamber of Commerce would delay the increases in unemployment taxes for several more years, he said.

But Rhoads said he believes the economy will be recovering by 2012 and that the state needs to begin to rebuilding the fund.

"We need to be replenishing the reserve so that when the next recession comes, we won't be going through this," Rhoads said, adding that the benefits paid to the unemployed are an economic stimulus because recipients tend to spend the money as they receive it.

"It's not like they're saving it," he said. "They're going to spend it all. It has a direct effect on the economy."