Proposed Regulations in South Carolina will Affect UI Taxes

Transcription

1 Proposed Regulations in South Carolina will Affect UI Taxes October 20, 2014 The South Carolina Department of Employment and Workforce ( DEW ) has drafted the attached proposed regulations that would add a solvency surcharge to the South Carolina unemployment tax rates beginning in We expect these regulations to be adopted. The solvency surcharge would be assessed until the trust fund balance reaches a specified level of adequacy (more to follow on this). One important and employer-friendly element in the proposed regulation is that the solvency surcharge would be capped if the state enters into a recession during the trust fund rebuilding process. The solvency surcharge for 2016 would be computed to be sufficient to return the trust fund to solvency within four years. DEW states that For businesses, tax costs are projected to be comparable to or lower than tax costs currently in effect, barring a major recession. Attached is a projection that DEW provided to the SC Senate Labor, Commerce, and Industry Committee showing the difference between 2014 tax rates and projected 2016 tax rates, assuming a four-year rebuild period. DEW administers the unemployment law in South Carolina. One section of the law (Sec (C)) reads as follows: After the fund returns to solvency the department must promulgate regulations concerning the income needed to pay benefits in each year and return the trust fund to an adequate level as defined in subsection (A)(5). Subsection (A)(5) reads as follows: fund adequacy target means an average high cost multiple of one. The concept of linking a state s targeted trust fund balance to an average high cost multiple (AHCM) is supported by the U.S. Department of Labor. The idea is to have a reasonable chance to weather a recession without having to borrow federal funds. An AHCM of 1.0 means that the trust fund could provide for one year s projected UI benefit payments based on the three highest cost years over the past 20 years or the last three recessions, whichever is longer. For South Carolina in tax year 2016 this equates to approximately $785 million. Clearly the proposed regulations are required by statute to be in place for calendar years after the fund returns to solvency. Interestingly, the SC trust fund has not yet returned to solvency. It is still $270 million in debt to the federal government. Having said that, it appears that DEW is preparing the regulations now, so that they will be in place for 2016, when the trust fund will likely be solvent. One Vantage Way, Suite A-105 P.O. Box Nashville, TN thomasandthorngren.com

2 South Carolina has taken significant legislative action to shore up the trust fund, including limiting UI benefits to a maximum of 20 weeks (previously 26 weeks). Although there continues to be an outstanding federal loan, it has decreased from over $500 million a year ago, and it appears the loan balance can be paid off within twelve months or less. There is a secondary consideration for tying UI tax rates to the AHCM. Occasionally a state unemployment agency is forced to secure a cash flow loan from the federal government when there is a significant increase in unemployment benefit payments. These loans have historically been interest free if they were repaid by September 30 of the year in which funds were borrowed and if there were no further loans before the end of the calendar year. Beginning in 2014, these loans will not be interest free unless the trust fund has reached a specified level of solvency, tied to the AHCM, in at least one of the last five years. By 2019, a state must have reached a level of one times the AHCM in one of the prior five years in order to qualify for an interest-free cash flow loan. We are supportive of the concept of maintaining a UI trust fund balance in non-recessionary times equal to one times the average high cost multiple (AHCM). This is a reasonable and responsible goal, to avoid borrowing federal funds and incurring the costs associated with such loans. Further, it is generally desirable to avoid wide swings in UI tax rates from one year to the next, and maintaining a solvent trust fund can smooth out such rate changes. Fourteen states had trust fund levels exceeding one times their AHCM at the end of The time to build the fund solvency is when UI claims activity is moderate and before another recession hits, which is the environment in which we find ourselves now. The issue of whether or not UI taxes should be adjusted to restore fund solvency has already been decided in South Carolina and is hard-wired into the statutes at this point, as a result of legislation enacted in The proposed regulation only addresses how the fund solvency should be accomplished. The proposed solvency surcharge would not be levied equally among all employers. Rather, employers with low tax rates would be assessed a smaller surcharge. One could make a good argument that employers with low tax rates (and stable employment) did not cause the solvency problem to the same extent as did employers with high tax rates, and therefore high claims activity, so the solvency surcharge should be a graduated rate (as proposed). There is a public comment period open until November 12, Written comments may be submitted by to RegulationComments@dew.sc.gov on or before 5:00 p.m. on November 12, Please do not hesitate to contact us if you would like to discuss this further. One Vantage Way, Suite A-105 P.O. Box Nashville, TN thomasandthorngren.com

3 Document No. DEPARTMENT OF EMPLOYMENT AND WORKFORCE CHAPTER 47 Statutory Authority: 1976 Code Section and Section (C) Definitions Unemployment Trust Fund Solvency Preamble: The South Carolina Department of Employment and Workforce proposes to add regulations and in Article 5. Unemployment Trust Fund, as required by SC Code Ann (C), to define how the Department will determine the income necessary to be raised each year to return the trust fund to an adequate level as defined in SC Code Ann (A)(5). Notice of Drafting for the proposed regulation was published in the State Register on August 22, Section-by-Section Discussion Definitions. This section provides definitions for terms used in the following section Unemployment Trust Fund Solvency. This section provides details on how the income necessary to be raised each year to set state unemployment insurance tax rates will be determined based on economic conditions. Notice of Public Hearing and Opportunity for Public Comment: Interested persons may submit written comments to Jean Cecil Frick, Director of Governmental Affairs and Special Projects, 1550 Gadsden St. Columbia, SC or by to on or before 5:00 p.m. on November 12, A public hearing is scheduled for November 13, 2014 at 10:00 a.m., at the Administrative Law Court in the Edgar Brown Building, Second Floor, 1205 Pendleton Street, Columbia, South Carolina. To review the regulation, visit the Department s website at: Preliminary Fiscal Impact Statement: No additional state funding is requested. The South Carolina Department of Employment and Workforce estimates that no additional costs will be incurred by the state and its political subdivisions in complying with the proposed Regulation and Statement of Need and Reasonableness: DESCRIPTION OF REGULATION: , Definitions. Purpose: Regulation provides definitions for the terms used in Regulation to provide a clearer understanding for all stakeholders of how the Department determines the income necessary to

4 set unemployment tax rates each year to return the trust fund to an adequate level, once the unemployment insurance trust fund has returned to solvency. The definition section limits ambiguity by defining terms. Legal Authority: 1976 Code Section (C) Plan for Implementation: The proposed Regulation will be implemented by staff in the Unemployment Insurance Tax Division when setting tax rates each year in consultation with the United States Department of Labor. DESCRIPTION OF REGULATION: , Unemployment Trust Fund Solvency. Purpose: Regulation outlines how the Department determines the income necessary to pay benefits and return the trust fund to an adequate level, as defined by S.C. Code Ann. Section (A)(5) and S.C. Code Section (C), and in what time period, once the unemployment insurance trust returns to solvency, as directed in S.C. Code Ann. Section (C). The Regulation provides for limitations on the increases in taxes if the state enters into a recession during the trust fund rebuilding process and provides for the lowering of taxes if the trust fund exceeds the adequacy target. Legal Authority: 1976 Code Section (C) Plan for Implementation: The proposed Regulation will be implemented by staff in the Unemployment Insurance Tax Division when setting tax rates each year in consultation with the United States Department of Labor. DETERMINATION OF NEED AND REASONABLENESS OF THE PROPOSED REGULATION BASED ON ALL FACTORS HEREIN AND EXPECTED BENEFITS: As reflected in 1976 Code Section (C), the Department must ensure the public has an understanding of how tax rates will be set each tax year to ensure that the unemployment trust fund is returned to an adequate level. The purpose of the proposed regulations are to define the terms used in the regulation and to provide detailed information about how the Department will estimate the amount of income necessary to be raised in each year to return the trust fund to the fund adequacy target given various economic situations that could arise. DETERMINATION OF COSTS AND BENEFITS: There will be no increased cost to the state or its political subdivisions. For businesses, tax costs are projected to be comparable to or lower than tax costs currently in effect, baring a major recession. Tax rates will adjust accordingly as prescribed in the proposed Regulation. UNCERTAINTIES OF ESTIMATES: There are no uncertainties of estimates relative to the cost to the state or its political subdivisions as they are not subject to quarterly unemployment insurance taxes and reimburse the Department dollar-for-dollar for all unemployment benefits charged against their accounts. The estimates for impact on the business community will be variable based on the state of the economy and the timing of the next economic contraction. EFFECT ON ENVIRONMENT AND PUBLIC HEALTH:

5 The proposed regulations have no effect on the environment or on public health. DETRIMENTAL EFFECT ON THE ENVIRONMENT AND PUBLIC HEALTH IF THE REGULATION IS NOT IMPLEMENTED: There will be no detrimental effect on the environment or public health if the regulations are not implemented. Statement of Rationale: Regulations and establish the procedure by which the South Carolina Department of Employment and Workforce will determine the amount of income necessary to pay benefits and return the unemployment trust fund to an adequate level. These regulations also provide guidance to the Department for setting tax rates in the midst of a recession during the rebuilding process as well as a mechanism to lower tax rates for businesses if the trust fund exceeds its adequacy target. The Department will consult with the United States Department of Labor and review annual data provided by the Congressional Budget Office in determining the projected benefits. Text: Definitions. 1) Department means the South Carolina Department of Employment and Workforce. 2) Fund adequacy target means an average high-cost multiple of one. See S.C. Code Ann (A)(5). 3) Solvency surcharge is a surcharge imposed on contributory employers in each year the unemployment trust fund is solvent but the trust fund reserve does not meet the fund adequacy target. 4) Fiscal year begins on July first of each year and ends on June thirtieth of the succeeding year. 5) Tax year begins on January first of each year and ends on December thirty-first of each year. 6) Trust fund reserve means the unemployment compensation fund, excluding distributions from the federal government, pursuant to 42 U.S.C. 1103, commonly referred to as the Reed Act. See S.C. Code Ann (A)(6) and ) Cap is the greater amount of either: (1) the actual benefits paid in the prior fiscal year or (2) the projected benefits for the next tax year Unemployment Trust Fund Solvency Pursuant to South Carolina Code Annotated Section (C) and Section (1)(b), the Department must annually calculate the income necessary to pay benefits and reach the fund adequacy target for the unemployment trust fund. The Department determines the total income needed as follows: (1) Projected benefits will be determined for the next tax year in consultation with the United States Department of Labor and with annual data provided by the Congressional Budget Office, subject to subsection (2).

6 (2) The income needed to pay benefits and return the unemployment trust fund to the fund adequacy target may also include a solvency surcharge. A solvency surcharge shall be in effect for each tax year that the trust fund reserve is less than the fund adequacy target, as of June 30 th, subject to (2)(a). The aggregate amount of the solvency surcharge will be determined for each tax year to be the amount calculated to return the unemployment trust fund to the fund adequacy target within four years subject to the following: (a) When actual benefits paid in the prior fiscal year are greater than the actual tax collections received in the prior fiscal year, then the cap, as defined in (7), is triggered. For the purpose of this section, tax collections shall exclude all penalties, interests, contingency surcharges, and recording fees. Once the cap is triggered then: (i) If projected benefits for the next year are less than the cap, then the solvency surcharge shall be the difference between the cap and the projected benefits. (ii) If projected benefits for the next tax year are equal to the cap, then no additional solvency surcharge will be added for the next tax year. (3) After the cap has been triggered, as described in (2)(a), and in the prior fiscal year, actual benefits paid were less than actual tax collections, then tax rates for the next tax year will be set based on returning the unemployment trust fund to the fund adequacy target within the next four years. (4) If the balance of the unemployment trust fund, as of the end of the most recently completed fiscal year, is greater than the fund adequacy target, then the Department may use the surplus amount to reduce taxes in the next tax year. (5) Notwithstanding the provisions of (2), once the fund adequacy target has been met, in subsequent tax years, the solvency surcharge shall be set in the event the unemployment trust fund balance does not meet the fund adequacy target, as of the end of the most recently completed fiscal year, as shown in the following table: Percentage the unemployment trust fund Rebuilding period balance is below the fund adequacy target More than %, but less than % One year % or more, but less than % Two years % or more, but less than % Three years % or more Four years (6) In a fiscal year in which the fund adequacy target is reached, the Department will determine tax rates for the following tax year without a solvency surcharge and pursuant to South Carolina Code Annotated Section

7