Is State Unemployment Fund Still Up to the Job?

Focus #14 • June 2023


After COVID-19 caused the balance in Wisconsin’s jobless fund to fall by one of the largest amounts on record, reserves grew last year. The more than $200 million improvement helps to avert tax increases on employers and shows that Wisconsin’s pioneering unemployment program has survived the pandemic. Yet the state’s reserve levels remain below those of most states and lag a key benchmark of readiness for the next recession.

After two straight years of declines, the balance in Wisconsin’s unemployment fund rose by $232.9 million in 2022, federal data show. The 20.7% increase from $1.12 billion on Dec. 31, 2021 to $1.36 billion one year later was a welcome comeback for a key state program that seemed to be facing an existential crisis just three years ago (see Figure 1).

A tidal wave of layoffs in the first days of the coronavirus pandemic prompted warnings from the Forum and others that the reserves used to make insurance payments to unemployed workers could be exhausted or severely depleted. The program held up much better than expected, however, due to the fund’s relatively strong level of reserves in early 2020, an unprecedented influx of federal aid, and some more modest help from state income and sales tax revenues.

After these recent challenges, businesses can take solace in the fact that the state’s unemployment reserves grew enough in recent months to prevent a payroll tax increase in January 2024. Both workers and employers should remain watchful, however, as Wisconsin’s reserve levels still fall well below those of most other states and far short of the federal government’s recommended level.

A flood of unemployment claims

Created in 1932, Wisconsin’s first-in-the nation unemployment system uses payroll taxes on employers to fund temporary benefits for qualifying workers who lose their job through no fault of their own. This form of insurance carries a cost for employers and also can indirectly limit workers’ compensation. Yet it also provides a safeguard for the overall economy. By ensuring the unemployed retain some basic spending power, it protects both affected workers and everyone in the state from the economic shock of layoffs.

That protection was desperately needed in the spring of 2020. With the onset of COVID-19 and the resulting lockdown orders, businesses such as restaurants, taverns, and hotels closed or sharply curtailed their operations, prompting a flood of unemployment claims by their workers. From the week of March 14, 2020, to the week of April 18 of that year, continuing unemployment claims in Wisconsin grew by more than seven fold, from 43,607 to 321,063, easily the most on record in U.S. Department of Labor (DOL) data going back to the late 1980s.

In the spring and early summer of 2020, it seemed possible that Wisconsin would once again have to borrow money from the federal government to make its unemployment payments to workers. That would have been a return to the days of the Great Recession, when Wisconsin’s jobless fund at one point was carrying nearly $1.7 billion in debt and employers had to pay additional federal payroll taxes to discharge it.

During the pandemic, 22 states had to borrow federal funds to make jobless payments, a recent DOL report shows. Wisconsin avoided that fate for two reasons. The first was that after the long economic expansion of the 2010s, Wisconsin’s jobless fund had reasonably strong reserves. The balance in the state’s unemployment reserve fund reached $1.97 billion on Dec. 31, 2019 – the most since the 2001 recession after accounting for inflation, according to DOL data.

The drop of $839.5 million over the course of 2020 was severe – it was the largest since the $1.13 billion decline in 2009 at the height of the Great Recession and one of the largest in history even adjusting for inflation. Yet because the state was relatively well prepared, the jobless fund retained a balance of $1.31 billion at the end of December 2020.

The fund then essentially bottomed out in 2021, dropping by just $9.2 million at the end of year, and then its balance began to climb again in 2022. The Legislature and Gov. Tony Evers also boosted the unemployment fund balance during the current two-year budget by approving the transfer of $120 million in general fund revenues from sources such as income and sales taxes into the fund.

The second lifeline for the state’s jobless workers and unemployment fund came from the federal government, which poured $4.99 billion into Wisconsin for new and existing benefit programs for those affected by the pandemic layoffs, according to Legislative Fiscal Bureau figures. These programs temporarily increased the total weekly payments that were made to those workers who already qualified for unemployment benefits and, for a time, also extended benefits to new classes of previously ineligible workers such as independent contractors and the self-employed. Figure 2 shows a breakdown of the various federal programs along with how much in total payments they made to Wisconsin recipients and how long the programs lasted. For a detailed description of each of these programs, see this Forum blog post.

How tax increases were averted

Under Wisconsin law, the unemployment payroll tax rates applied to all employers can rise and fall automatically each January based on the balance in the jobless fund at the end of the previous June. As part of the state budget two years ago, lawmakers and Evers suspended that rule in 2022 and 2023 to keep payroll taxes low while providing about the same amount of additional revenue through the transfer of income and sales tax dollars.

Going forward, however, the automatic tax rate system once again applies. Reserves of $1.2 billion or more trigger the lowest of the four state schedules, or series of tax rates, and the reserves on June 30 should finish comfortably above that threshold – a major advantage in the short term for employers.

Businesses and other employers also have benefited from another notable change made to state law during the pandemic. Normally, when employers such as restaurants lay off workers, the rating reflecting their specific unemployment history falls and as a result the tax rates on such businesses rise to replenish their individual accounts. Given the unavoidable impact of COVID-19, however, lawmakers and Evers chose to pay the jobless claims during the pandemic out of the main reserve pool within the unemployment fund rather than charge them to specific employer accounts.

This decision saved some businesses from substantial tax increases. Wisconsin Department of Workforce Development figures show the state unemployment taxes collected in 2022 totaled $461.7 million, which was up 1% from the previous year. Yet it was still the second-lowest amount since 2002 – even without adjusting for inflation – and was down 61.1% since the 2012 peak of $1.19 billion.

Fund still lags other states

These figures might suggest that Wisconsin’s unemployment fund is fully restored and ready for even a severe new recession. That is not the case, however.

The federal government recommends states maintain a minimum solvency level that accounts for a state’s current reserves as well as the potential claims that might have to be paid in a recession. The DOL target looks at whether the state fund would be able to cover one year of benefit payments at a rate equal to the average of the three highest claims years within the past two decades.

In DOL’s most recent report on state unemployment funds, Wisconsin scored a 0.55 on this metric known as the average high cost multiple (see Figure 3). That means that instead of being able to meet the federal recommendation and cover one year of unemployment benefits at a historically high rate, Wisconsin could cover about six-and-a-half months. That ranks 33rd out of the 50 states and is down substantially from January 2020, when Wisconsin scored 0.97, or just short of the federal target of a score of 1.0 or higher.

Meeting that federal benchmark qualifies a state unemployment program for interest-free federal loans under certain circumstances. Wisconsin, however, hasn’t met that federal standard since 2000.

What’s next for jobless benefits?

Wisconsin’s unemployment fund was in strong shape just prior to the pandemic, and employers in the state reaped the reward. State and federal payroll taxes remained relatively low during COVID-19 despite an avalanche of unemployment claims early on.

Today, the unemployment rate is near historic lows but inflation is still relatively high and the Federal Reserve has been raising short-term interest rates to try to further slow the growth in consumer prices. The higher interest rates, in turn, have raised the near-term risk of a recession. The state’s unemployment fund reserves, however, remain well below federal recommendations as well as the levels in most other states, potentially leaving Wisconsin unprepared for another downturn.

Policymakers may wish to consider steps to raise the jobless fund balance gradually over time and requalify the state for interest-free federal loans. One possibility would be to draw on the state’s massive budget surplus to transfer further income and sales tax dollars into the unemployment fund. Other options would include taking steps to reduce jobless benefits in targeted ways; or increasing revenues either by requiring a higher unemployment fund balance to trigger the lowest tax schedules or expanding the amount of employee wages subject to the state’s payroll tax.

The Great Recession taught Wisconsin a painful lesson: a downturn is the worst possible moment to have to borrow and raise tax rates to make jobless payments. Preparing for hard times now may help the state avoid that fate in the future.