Recent data shows that Kentucky’s Unemployment Insurance (UI) Trust Fund is entering into 2023 in a stronger position than in previous years, thanks to legislation passed by the General Assembly and championed by the Kentucky Chamber. In addition, UI tax contributions paid by employers will remain on the state’s most favorable rate schedule in 2023 instead of increasing.
According to U.S. Treasury data, Kentucky closed out quarter three of 2022 with more than $700 million in the Fund. All benefits paid out to unemployment claimants in Kentucky derive from the UI Trust Fund, which is funded by taxes paid by Kentucky employers and business owners.
The current strength of the UI Trust Fund is important, given Kentucky’s long insolvency history. The federal government releases annual reports highlighting the solvency levels of trust funds across all 50 states. Federally-designated solvency is based on the ability of a state’s trust fund to pay out benefits to unemployment claimants during recessions. Kentucky’s UI Trust Fund has not met federally-designated solvency levels since 1974. The only other state to have experienced insolvency for a longer period is Pennsylvania, which last reached solvency in 1971. Some states in the southeast region – like Georgia, North Carolina, and Florida – were considered solvent as recently as 2019.
An insolvent trust fund increases the likelihood of a state needing to request federal assistance during recessions. Generally, when a state’s trust fund is depleted, that state has to request a loan from the federal government called a Title XII advance. These advances, while necessary to continue providing benefits, can be costly. They are repaid by states with interest (in most cases) and can lead to higher tax rates for employers in the state. During the height of the COVID-19 pandemic in 2020, Kentucky’s UI Trust Fund was depleted, running down a balance of more than $600 million, which employers had built up through several years of increased tax rates and contributions. Kentucky was one of several states that received a Title XII advance to continue paying out benefits.
As a result of legislation championed by Kentucky State Representative Russell Webber in 2021 and 2022, the General Assembly appropriated portions of the state’s federal relief dollars to replenish the UI Trust Fund and kept employer contribution rates at competitive levels. These appropriations, combined with regular contributions made by employers, have helped the UI Trust Fund reach its current balance.
A strong trust fund balance prepares a state to weather a recession, decreases the likelihood of a state needing to request a federal loan, and keeps employer UI tax rates competitive with other states. Trust fund health is one of the key factors in determining an employer’s UI tax contribution rate in Kentucky.
On the whole, Kentucky’s average employer contributions rates in 2021 were slightly lower than the nation as a whole – $236 per covered employee vs. $295 respectively – but higher than neighboring states like Indiana ($187), Tennessee ($78), Missouri ($143), and Virginia ($113). Other measurements of average employer contribution rates show Kentucky closer in line with nationwide rates yet still higher than most neighboring states. Research organizations like the Tax Foundation have considered Kentucky’s overall unemployment insurance tax structure to be one of the least competitive in the nation. Nonetheless, Kentucky’s current Trust Fund balance will ensure employers will continue paying UI taxes under the state’s most competitive rate schedule in 2023. Had the Trust Fund been at a lower level at the end of quarter three of 2022, employers could have faced a rate increase of $75 per covered employee on average, totaling $128 million.
“Maintaining competitive UI tax rates is important to the state’s broader economic competitiveness,” said Kentucky Chamber Center for Policy and Research Executive Director Charles Aull. “A company’s UI tax burden is one of numerous factors that shape employer location or investment decisions and contributes to the broader cost of doing business in a state.”
Despite the strength of Kentucky’s Trust Fund heading into 2023, the state likely still has a ways to go before reaching federal solvency minimums. Heading into 2022, Kentucky’s Trust Fund had less than a quarter of the funds it needed to reach federal solvency minimums, and its solvency rating was among the bottom half of states. Much more work remains to be done to improve the overall health of Kentucky’s Trust Fund.
“To reach federally designated solvency levels, Kentucky employers will need to build on the current balance by continuing to make consistent tax contributions to the Trust Fund. In addition, broader reforms to benefits from House Bill 4 passed in the 2022 session will go a long way in helping to keep costs under control by more efficiently supporting re-employment among claimants,” said Aull. “These two factors together will help ensure Kentucky has a strong and sustainable Trust Fund that is ready to support workers during economic downturns while keeping costs competitive for employers.”
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