Among the challenges Connecticut's incoming governor faces: an insolvent unemployment compensation fund that could ultimately cost the state's employers hundreds of millions of additional dollars in payments.
A warning about the condition of the Unemployment Insurance Trust Fund was included in a transition memo the Department of Labor drafted for Democratic Gov.-elect Ned Lamont, who takes office in January.
"The UI Trust Fund, out of which the UI Benefits are paid, is not solvent. The current system of imbalanced Unemployment Insurance tax benefit payouts is not sustainable," reads the document, obtained by The Associated Press through a public-records request. Departing Democratic Gov. Dannel P. Malloy asked each of his state agency heads to prepare transition reports for his successor.
There is currently $609 million in the trust fund, which is funded by employers. The recommended amount, however, is $1.7 billion to handle an economic downturn.
Approximately 25,000 benefits are issued weekly, amounting to $9 million. The transition memo warns Connecticut might have to borrow from the federal government to continue paying the benefits, as it did in 2009. That's when the state's employers ended up paying $504 million in increased Federal Unemployment Tax Act taxes from 2011 to 2015 to repay the loan, as required by federal law. That's in addition to $85 million in interest payments.
The Department of Labor said the average annual $42 per employee federal tax increased during that period to an average of $189 per employee. That was in addition to the larger state unemployment tax, which varies depending on an employer's history of layoffs.
Business advocates plan to make Lamont aware of the trust fund's financial challenges, as well, arguing the system needs to be reformed before businesses face another round of higher taxes. Lamont, a cable company founder, vowed during the campaign to provide small businesses with financial relief.
"We really want to hold the line on new taxes unless we see some of these structural changes that need to happen in order to ensure solvency going forward," said Eric Gjede, vice president for government affairs for the Connecticut Business and Industry Association. "We just can't keep throwing money at a problem because the problem keeps coming back. We need to make long-term changes."
Former Labor Commissioner Scott Jackson warned it was "urgent" that Connecticut "build a system that is sustainable for the future" in 2016, after the federal loan was repaid.
Connecticut's Employment Security Advisory Board recommended several ways to help improve the solvency situation in 2017, such as not allowing claimants to collect unemployment benefits while receiving severance pay and freezing the maximum, weekly benefit rate for three years. But those and other reforms have not been made.
Gjede, who sits on the advisory board, said there's disagreement between labor and business advocates on the board about what reforms are needed. He hopes a deal might be worked out in the coming weeks.
Gjede said CBIA has recommended its own reforms for the General Assembly to consider in past legislative sessions, but to no avail. For example, Connecticut workers need to earn only $600 in a year to qualify for unemployment benefits, a threshold he said hasn't changed since 1968. Most states, he said, have a $2,500 to $5,000 earnings threshold.
The transition memo notes how the Labor Department relies on federal funding for 75 percent of its operations and how its federal allotment has been shrinking, due mostly to the improving economy. That forced the agency to end its unemployment compensation fraud unit and cut staff from 803 in 2015 to 574. But Commissioner Kurt Westby said the agency has still been able to "offer quality services" by consolidating offices, merging units and using technology, such as an online filing system for claims.