Larger downturn threatens system

With the economy heading south and the financial markets in disarray, there are new concerns that the state's unemployment insurance fund could go broke in as little as six months if Kentucky enters a full-blown recession.

A non-profit watchdog group says that Kentucky and 13 other states might not have enough money in their unemployment insurance coffers if unemployment claims reach the same level they did in three previous recessions.

The National Employment Law Project, a New York group that monitors employment issues, studied states' unemployment insurance funds and found that many — including Kentucky — were in a worse financial position going into 2008 than they were before the 2001 recession, according to a May report that gained more traction as the economy soured this week.

Officials with the Kentucky Office of Employment and Training say the fund's current balance — $186 million — is lower than officials would like, but the fund is currently solvent and healthier than some other states.

Kim Brannock, a spokeswoman for the Office of Education and Training, said the unemployment office could not say whether the report's dire predictions are correct because the economy is changing too quickly.

"We can't make a specific projection with any degree of precision at this point," Brannock said. "It is a fluid situation."

But unemployment numbers nationwide and in Kentucky continue to climb. The state's unemployment rate in August was 6.5 percent, compared to 5.1 percent in 2007, according to labor statistics. Nationally, the U.S. Department of Labor said that unemployment benefits reached their highest levels in August since the recession of 2001.

In August, there were more than 40,000 people who received unemployment benefits in Kentucky, up nearly 59 percent from a year ago. The average weekly benefit is $306.

Authors of the study caution that those numbers could mean the state's unemployment fund will go broke in as little as six months.

Kentucky's unemployment insurance fund balance is down 31 percent from the $271 million it had in October 2007. But the fund will get an influx of tax revenue after the fourth quarter, Brannock said. Still, those revenues will be much less than previous quarters, state officials said.

Even if the fund goes dry, the state still is obligated to pay unemployment benefits for those who lost a job through no fault of their own, according to the report and federal unemployment laws.

If a state's unemployment fund goes broke it has two options — borrow money from the federal government or issue bonds, which can cost states more in the long-run. Kentucky had to borrow money in the early 1980s to shore up unemployment coffers, state officials said.

Unemployment insurance trusts are funded through unemployment insurance taxes that employers pay into the fund. Kentucky sets the unemployment insurance tax rate on Dec. 31 and that rate schedule is set depending on the financial health of the fund, Brannock said. But that's not necessarily good public policy, the authors of the study noted.

When business is bad or the economy enters a recession, businesses shouldn't have to pay more taxes, the study said. States should build reserves during good economic times.

"Several states did not build adequate reserves to prepare for the oncoming economic downturn," authors Rick McHugh and Andrew Stettner said in the report. McHugh and Stettner were not available for comment Thursday.

The report makes several recommendations to ensure that funds don't follow economic cycles. One suggestion is to expand the tax base so more revenue would go into the fund, which several states have done.

Mary Lassiter, the state budget director, said the last changes made to the tax were during Gov. Paul Patton's administration in the 1990s. But Lassiter noted that unemployment officials had studied expanding the tax base in the past.

Despite the dire predictions, Brannock reiterated that everyone who currently receives benefits will continue to receive them.

Other states are in a much more difficult position than Kentucky, she said. "It's obviously much lower than we would like to be but we, like half the states out there, are monitoring the situation."