Due to unprecedented strains placed upon the unemployment system by the economic impacts of the COVID-19, Virginia’s Unemployment Trust Fund ended the first quarter of 2021 with a negative balance of $400,000. This figure represents a glaring contrast with the $1.4 billion balance of the Trust Fund that existed a year ago, prior to the pandemic. Unless action is taken by the General Assembly to supplement the Trust Fund, employers throughout the Commonwealth will likely see tax increases to preserve the Trust Fund’s solvency. This would include local governments.
Unemployment Insurance (UI) taxes are paid primarily by employers on the wages paid to employees. These taxes flow into state UI trust fund accounts maintained at the U.S. Treasury. These same accounts are the source of benefit payments to eligible claimants in the regular state UI program. There are no federal requirements for the amount of funds that should be kept in a state’s trust fund; however, each state operates on a forward funding basis by building up reserves in anticipation of paying a higher amount of benefits during recessionary periods. More information on UI tax rates may be found here.
There are three components that make up Virginia’s unemployment insurance tax. The first is the base tax rate which is experience rated and unique to each employer depending on their individual loss history. The second is the pool charge, which is the socialization across all covered employers of all benefit charges that cannot be charged to individual employers. The final component is the fund builder, which is imposed on all covered employers when the trust fund balance factor defined in Code Section 60.2- 533 falls to or below 50%. The fund builder assessment is an additional 2%. Employers also pay federal unemployment tax of $420 per employee. Because Virginia’s unemployment laws conform to federal law, Virginia employers receive a 90% reduction in their federal unemployment tax. If Virginia borrows from the federal government and does not repay within the terms set by the federal government, the Commonwealth could be considered out of conformity and Virginia employers would lose this reduction. More information on Virginia’s UI system can be found here.
On June 10, Ellen Marie Hess, Commissioner of the Virginia Employment Commission (VEC), provided updates on the status of Virginia’s Unemployment Trust Fund. This was followed by a presentation by Governor Northam’s Chief Workforce Development Advisor, Dr. Megan Healy to the House Appropriations Committee on June 24. During 2020, UI initial claims spiked to 1,369,045, nearly a million higher than the previous year. Fortunately, Virginia’s unemployment rate continues to decline and now stands at 4.7%; however, this is still above the pre-pandemic rate of 2.6%.
Given the current status of the Trust Fund, without an additional infusion of funds by the General Assembly, employers could see UI taxes jump by 400% in 2022. This would comprise increases to both the base tax rate and pool charge. These were concerns that VACo discussed in a July 2020 webinar with staff from VEC.
In May of this year, Governor Northam and Democratic leaders in the General Assembly released a statement outlining their legislative priorities for the upcoming August 2 Special Session, which included a commitment to add funding to the Trust Fund. According to guidance from U.S. Treasury on the use of America Rescue Plan Act (ARPA) Fiscal Recover Funds, deposits into state Unemployment Trust Funds are an acceptable use of funds. Out of the $4.3 billion in ARPA fiscal recovery funds available to the state, Secretary of Finance Aubrey Layne has recommended use of at least $1 billion to help replenish the fund towards solvency and forestall a tax increase on employers, though House Appropriations Committee staff have indicated that a small dollar amount may achieve the same results.
Replenishment of the Unemployment Trust Fund was included by VACo as a priority in a letter recently sent to Governor Northam and Chairs of the House Appropriations Committee and Senate Finance and Appropriations Committee on the use of state ARPA funds. VACo will continue to provide updates on this and other issues likely to be addressed during the Special Session.
VACo Contact: Jeremy R. Bennett