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A state audit released Wednesday indicates the state's unemployment fund could be insolvent as of next year.

January 09, 2002
By: Julian Pecquet
State Capital Bureau

JEFFERSON CITY - The 92nd session of the Missouri Legislature, already faced with dim economic prospects, may well have to deal with the added burden of preventing the state's unemployment benefits fund from going under at the end of next year.

In an audit released Wednesday, State Auditor Claire McCaskill said the fund would be insolvent as of 2003. And she's looking at the state legislators to fix the problem.

"Benefit payments from the state's Unemployment Compensation Trust Fund are expected to exceed revenues by $414.4 million in calendar years 2001 and 2002, leading to the fund's insolvency," the audit said.

According to McCaskill, Missouri is obligated under federal law to balance the benefits paid to unemployed workers, which are funded almost entirely through payroll taxes by employers.

"This is a mandatory fund, which must be fixed within 2 years of going under," McCaskill said. "If it is not fixed in this session, we will be facing a federal bail-out before the end of the next legislative session."

McCaskill blamed the fund's shortcomings on Missouri's "pay-as-you-go" system, which matches unemployment taxes with benefits paid during the year. She said that the state's current laws that restrict the fund balance growth once a $500 million ceiling is reached did not allow for sufficient growth during good economic times.

"When the economy is going the wrong way it is the worst time to ask for businesses to pay more," McCaskill said. She recommended the fund be allowed to grow to at least $1 billion in good economic times before restricting actions be taken, in order to provide a cushion for potential economic slowdowns. According to the audit, Missouri today can only pay benefits for less than 4 months before needing more revenue, a figure well below the national average.

The audit also criticized some businesses for spending more than they put in, and said the employer unemployment tax rates were too low. It also said Missouri's $7,000 taxable wage base, the portion of employee earnings on which an employer pays unemployment taxes, was the lowest allowed by federal law, and recommended it be increased.

McCaskill said Missouri's businesses had to understand that they were facing a "pay now rather than pay later" scenario, because a federal bail-out would mean the federal Department of Labor would reduce the federal unemployment tax rate credit (estimated at about $900 million) provided to Missouri employers.

Despite McCaskill's declaration that "it is very important the business community be the driving force," the business sector, unsurprisingly, did not respond favorably to the audit.

"The auditor's office is only looking at half the equation," said Kelly Gillespie, the Vice President of Governmental Affairs for the Missouri Chamber of Commerce.

According to Gillespie, the audit failed to look at the validity of the unemployment claims.

"One example of misuse of Missouri's unemployment compensation fund is the state's current practice of awarding unemployment compensation to individuals fired for illegal drug use."

McCaskill said such payments were "completely irrelevant to the solvency of this fund," and only represented a fraction of a percent.

Gillespie also questioned the surge in unemployment benefits in recent years, in the midst of an economic boom, which McCaskill explains through a free market analysis.

"Benefits increase because salaries increase in good times," she said.

Associated Industries of Missouri, another important business lobby, also voiced concerns about the fund's beneficiaries in a press release issued Wednesday, calling attention to recent cases of employees receiving compensation after having lost their jobs because of drug and alcohol use, job abandonment, or criminal acts.

"Associated Industries in Missouri believes that operational reforms are needed to get the system back on track, and will not support a tax increase unless it is accompanied by these reforms," the release said.