Hawaii employers that are still trying to recover from the pandemic may once again face a dramatic increase in their unemployment taxes unless lawmakers and Gov. David Ige’s administration come up with a fix in the legislative session that begins later this month.

The Department of Labor and Industrial Relations has paid out a staggering $6.5 billion in state and federal funds to cover unemployment claims and provide other assistance during the pandemic, and the state unemployment trust fund has been drained.

That fund now has a balance of only $123 million, and DLIR Director Anne Perreira-Eustaquio told members of the House Finance Committee on Wednesday the formula that defines what is an adequate fund balance calls for $1.3 billion in reserves to cover a year of potential unemployment claims.

The trust fund is financed with taxes levied on employers, so quickly pumping large amounts of new money into the fund to replenish it would require a large increase in unemployment tax rates via the contribution “schedule” that is imposed on businesses.

Instead, the Ige administration plans to introduce a bill to modify the way the required reserve balance in the fund is calculated. That would reduce the amounts employers must pay into the fund, at least temporarily.

The administration’s bill, which will be introduced later this month, would change the “benefit-cost ratio” that is used to calculate how much money is considered an adequate reserve to keep the trust fund solvent, Perreira-Eustaquio said.

“That would determine how much we bring in from employers every year,” she said. “We are trying to balance the solvency of the fund with looking at what we are calling our ‘anomaly period,’ which was the pandemic period.”

House Finance Committee Chairwoman Sylvia Luke said she understands that the administration plans to exclude the unemployment claims history for 2020 and possibly also for 2021 for purposes of calculating the assessments on employers.

However, “the viability of the trust fund continues to be a concern,” she said. She said the Legislature can take steps to help ease the burden on employers, “but that’s something that we need to assess and discuss with the department a little bit more.”

She said one solution might require the state to simply deposit more money into the unemployment trust fund, but that option requires further study.

Anne Perreira-Eustaquio, director of the Department of Labor and Industrial Relations. Courtesy: DLIR

 

 

Even if the bill passes, employers would need to pay significantly higher unemployment insurance rates in 2023, “and that’s because the reserve balance in the trust fund is extremely low,” Perreira-Eustaquio said.

The $123 million in the fund today “won’t bring us anywhere near solvency at this point, even with the bill,” she said.

The bill that will soon be introduced represents the second time the administration and the Legislature have tinkered with the unemployment trust fund formula to provide some relief to employers during the pandemic.

Lawmakers last year passed a law that effectively reduced the tax rates for employers for 2021 and 2022.

Sherry Menor-McNamara, president and CEO of the Chamber of Commerce Hawaii, said the pandemic years have been very challenging for businesses, and a sharp increase in the unemployment tax would have made things worse.

How to handle that tax in 2023 “is something we need to look at, just because, as we’ve seen, this pandemic doesn’t appear that it’s going away,” she said.

“It creates a fluid situation for businesses in an otherwise challenging environment” that includes workforce shortages and supply chain issues, Menor-McNamara said.

The Legislature also intervened even more dramatically last year to shield businesses from a large debt the unemployment system incurred during the pandemic.

The unemployment system was forced to borrow about $800 million from the federal government to help cover the cost of unemployment benefits during the pandemic shutdown, and employers would normally be required to repay that money.

Instead, the Legislature stepped in and appropriated $700 million in federal pandemic relief funding to help repay the loan, and the Ige administration directed another $100 million in additional federal funding to entirely clear the debt, Perreira-Eustaquio said.

Perreira-Eustaquio said the department believes it will be able to pay out unemployment benefits as needed in 2022 without taking out additional loans.

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