Pa.’s unemployment trust fund is broke. The Wolf admin says a long-term fix will save taxpayers millions.

Spotlight PA is an independent, nonpartisan newsroom powered by The Philadelphia Inquirer in partnership with PennLive/The Patriot-News, TribLIVE/Pittsburgh Tribune-Review, and WITF Public Media. Sign up for our free newsletters.

HARRISBURG — Pennsylvania lawmakers have failed to adopt a policy change that supporters say would bolster the state’s pandemic-battered unemployment program against future spikes in jobless claims while also avoiding huge draws on taxpayer money to prop up the system.

The state’s new budget includes money to pay off $42 million in debt that was incurred to keep unemployment benefit payments flowing as historic need outpaced related financial reserves in the COVID-19 era.

But a bill meant to ensure those reserves contain enough money to weather coming periods of economic turbulence has gone nowhere. That inaction could cost Pennsylvania taxpayers hundreds of millions of dollars in future interest payments, backers of the policy change say.

“No work has been done on that bill that I know of,” state Rep. Stan Saylor (R., York), a chief budget negotiator, told Spotlight PA before the state’s latest spending plan was approved on July 8. “You mentioning it is the first time I’ve heard of it, really.”

Saylor was referring to HB 549, a sprawling omnibus bill that has sat in committee since February 2021. The Democrat-sponsored bill would update aspects of the state’s unemployment program, including the solvency formula that determines how much money the program should have on hand to cover benefit payments.

The bill’s sponsors and backers say HB 549′s more cautious metric would better support the system and avoid more taxpayer-funded debt service on stopgap loans and bonds, but critics say it would unfairly burden already struggling business owners with heightened tax burdens.

Solvency is calculated by looking at what’s in a given unemployment trust fund reserve against what came out of the same reserve in a previous window of time, the goal being to use past demand to gauge future demand and prepare the coffers accordingly.

Pennsylvania’s unemployment trust fund — a federally held pot of money that’s administered by the state’s Department of Labor & Industry — is currently at 0% solvency and hasn’t been fully solvent since 1971, state officials say. That has meant a reliance on multibillion-dollar federal loans and the taxpayer-funded interest payments that come with them.

The exact amount of money needed to meet the definition of fully solvent fluctuates, and state officials did not directly answer a question about what the current number is. It was $6 billion in February 2020, according to the Courier Times. As of July 20 this year, the fund contained just $104 million.

Currently, the solvency rate dictated by state law looks at how much money is in the unemployment trust fund versus what it paid out in the last three years. L&I says that approach is perilous if three years of low unemployment are followed by a period of high unemployment, for instance.

HB 549 would adopt a formula that aligns with the one used by the federal government to determine trust fund solvency. It uses the latest three recessions — periods of heightened unemployment demand — instead of the last three calendar years as the baseline.

That change, HB 549′s backers say, would yield a more fiscally prudent forecast and solvency rate, better ensuring the revenue-generating mechanisms that feed the unemployment fund — taxes paid by employers, for example — are robust enough to cover costs on their own.

State Rep. Gerald Mullery (D., Luzerne), HB 549′s prime sponsor, argues that the update makes practical sense from an operational standpoint. He said ensuring there’s more money in the unemployment fund to begin with would prevent the kinds of large, taxpayer-funded debt and interest payments that are incurred when claims spike and the state turns to federal Title XII loans and state-issued bonds to cover benefit costs.

Between July 2013 and January 2020, the state paid more than $570 million in interest on a bond that was used to pay off more than $3 billion in federal loans that covered unemployment payouts during the Great Recession. (Millions of dollars were paid in direct interest on the federal loans, too.) That bond was paid off in full in January 2020 — two months before the COVID-19 pandemic hit and sapped the system all over again.

The state was approved to take out a federal loan of up to $2.8 billion to cope with pandemic demand months later.

But while Mullery touts promised benefits for taxpayers, opponents of his bill and its solvency formula shift say business owners would be unfairly forced to pick up the slack.

There are consequences to having a less solvent unemployment trust fund for employers and the unemployed. In Pennsylvania, when the rate dips below full solvency — a goalpost meaning the fund has 250% of the average annual benefit payout over the previous three years — maximum benefit payments to unemployed people decrease and state unemployment taxes paid by employers go up.

And because HB 549 would adopt a more conservative formula, the bill would likely make reaching full solvency more difficult, all but ensuring that employer taxes stay higher for longer, critics say. (State unemployment taxes are currently maxed out with the solvency rate at 0%.)

“We certainly appreciate the need for a solvent unemployment compensation system, but there has to be a balance,” said Alex Halper of the PA Chamber of Business and Industry, an advocacy group with 10,000 member employers statewide. Halper said Pennsylvania employers already shoulder a disproportionate share of the burden due to the state’s unemployment taxes being above the national average.

“Maybe we need to also look at who’s receiving benefits and whether benefits are being paid to individuals for whom this program was intended,” Halper added of unemployment claimants.

The PA Chamber and other business groups lauded the new state budget’s use of federal stimulus dollars to clear Pennsylvania’s mountain of unemployment debt. The move allows the state to effectively dodge federally mandated austerity measures, including a hike in federal unemployment taxes that employers pay on top of state unemployment levies.

But the influential lobbying organization remains opposed to HB 549 and the solvency formula change the bill proposes, and legislative opposition to the plan has largely mirrored the inclinations of such groups.

The Department of Labor & Industry, meanwhile, says the need for an updated formula is acute.

On the heels of the seismic economic disruptions of the COVID-19 pandemic, the existing state solvency formula is a more aggressive guidepost by default, since need has been soaring for two years running.

In the long term, though, there are few assurances, and L&I reports the program could find itself underfunded without a formula that adopts a more cautious permanent footing.

To demonstrate the difference, the department notes that Pennsylvania’s current formula had the state’s unemployment fund at 183% solvency — a strong number — in 2018.

The federal formula, though, which HB 549 emulates, told a very different story and placed the state well below a related minimum benchmark.

Correction: The spelling of Alex Halper’s last name has been corrected.

WHILE YOU’RE HERE… If you learned something from this story, pay it forward and become a member of Spotlight PA so someone else can in the future at spotlightpa.org/donate. Spotlight PA is funded by foundations and readers like you who are committed to accountability journalism that gets results.