Restricted Access to Unemployment Benefits Played Role in Paying Back Loan

Kentucky got the good news it has now paid off its $972 million loan from the federal government after the state’s unemployment insurance program fell into the red during the recession. While a recovering economy and additional employer taxes helped pay back the loan two years earlier than expected, so did the fact that Kentucky has restrictive unemployment benefits that have failed to keep up with a changing workforce, limiting the amount that’s paid out to jobless workers in need.

Kentucky’s unemployment insurance costs rose dramatically when job loss spiked in the Great Recession, depleting the state’s trust fund and forcing Kentucky to borrow from the federal government to pay benefits. In part, the state got in trouble because it drained its trust fund even in good times prior to the recession by collecting less in revenue from employers than it paid out in benefits.

In the absence of state action, federal taxes on employers would’ve automatically escalated to pay back the debt. Instead the state passed legislation in 2010 that both cut benefits for workers and raised employer taxes. The state also put in place a temporary employer surcharge in 2012 to pay interest on the federal loan. The cut for workers included reducing the share of lost wages that benefits would replace and adding a waiting week before jobless workers can receive benefits.

In addition to benefit cuts, tax increases and a growing economy, the state paid off its loan quickly in part because Kentucky workers have limited access to unemployment assistance. Only 22 percent of Kentucky’s jobless workers are actually receiving unemployment benefits, known as the recipiency rate. As shown in the graph below, that rate has hovered recently at its lowest level in three decades.

A bad economy for an extended period is one contributor to this trend, as many workers have run out of the maximum six months of state benefits without finding a job (and now there are no federal benefits that kick in after state benefits end because Congress let the program expire in 2013). But even for short-term unemployed workers, Kentucky’s recipiency rate is low at only 28.1 percent of those unemployed six months or less.

A reason for the low rate is Kentucky’s unwillingness to update its unemployment system to better fit the realities of today’s workforce. Kentucky missed the opportunity earlier this decade to modernize its unemployment insurance system and receive $90 million in federal money for doing so. It was one of only 12 states to turn down the financial incentives for unemployment modernization offered through the Recovery Act. Updates that other states enacted included:

• helping more low-wage workers become eligible by taking into account their most recent 3-6 months of earnings when determining eligibility;
• extending assistance to part-time workers who lose their jobs and are seeking part-time work;
• providing benefits for workers who quit for compelling family reasons including domestic violence or sexual assault or to care for a sick family member;
• offering benefits for long-term unemployed workers who require access to training to improve their skills.

A recent National Employment Law Project report outlines more ways the existing unemployment insurance system is out of step with today’s workforce.

For those who do receive benefits in Kentucky, the payments are very modest. The average benefit is just $294 a week — 33rd among the states — and replaces only 37 percent of the average weekly wage. Kentucky’s maximum benefit is $415 a week, while 30 states have a maximum that ranges higher. Benefits aren’t generous, but they help workers facing tough times and provide a stimulus to the economy just when it needs it most.

The existing state program is on the way to solvency and that’s a great thing. But with a changing reality for workers and another recession inevitable at some point, Kentucky should be having a conversation about how the unemployment insurance system can better help those who lose jobs meet their basic needs and get back on their feet.

Unemployment benefits

Recipiency rate is for Kentucky. Source: U. S. Department of Labor

Job Growth since Recession Continues, but Quality is Mixed

After major job loss in the Great Recession, Kentucky’s economy has gradually improved and the state has added 141,000 jobs since June 2009. The pace of job growth has picked up over the last year, with the state adding more jobs since last June than any year since 1999.

When it comes to job quality, though, the story is more complicated with both good and bad news for Kentucky workers. Growth in industries like manufacturing and logistics suggest Kentucky is strengthening its role as a production state. But jobs in some traditionally good-paying industries are changing, while other sectors with strong growth provide much less pay and job security. These trends raise important questions about whether new jobs being created can sustain Kentucky families.

One area of good news is the rebound in the auto industry. Kentucky gained 19,900 jobs in that sector over the last six years, or growth of 49 percent, from 41,000 jobs to 60,900. Growth was strong both in auto parts (49 percent) and assembly (54 percent). The auto industry has experienced revival due to the federal government’s financial rescue, restructuring of the industry, on-shoring of some production and Kentucky’s strong supply chain. Average weekly pay in the industry in Kentucky is an impressive $1,182, although new jobs typically pay less than existing jobs.

Related to recovery in manufacturing nationwide, along with increases in consumer spending, is growth in transportation and warehousing jobs. Jobs in that sector have increased by 10,900, or 13 percent, since 2009. Kentucky’s location makes it a key state in that industry. Average pay is $964 a week.

However, the single industry that has had the most job growth is far less encouraging: employment services made up primarily of temporary agencies. The state saw 32,400 new jobs in employment services over the last five years (meaning one in five of the net new jobs created), or growth of 116 percent. Traditionally associated with service businesses, temp agencies are increasingly used to staff manufacturing industries as well — including the auto industry.

Jobs provided through temp agencies typically have lower pay, receive less training and are associated with poorer working conditions. Average weekly pay in this sector in Kentucky is just $449 a month. An important question is the extent to which the explosion in temporary jobs reflects the early stages of the recovery — with industries making more jobs permanent as the recovery advances — versus a permanent change in businesses’ staffing patterns.

Among other lower-paying industries that have added substantial employment, food services and drinking places (primarily restaurants, both full-service and fast food) have added 17,800 jobs. Average pay in that industry is only $289 a week compared to $836 for all industries. Fast food workers have become widely-recognized symbols of a low-wage economy, and many tipped restaurant workers struggle to make ends meet.

Some health-related services have also had strong job growth. Kentucky added 9,300 jobs over the last six years in ambulatory health care services, meaning doctors’ and dentists’ offices and other outpatient health care facilities. Growth is particularly strong in the last year, with health care reform and especially the Medicaid expansion likely playing a role. The state has also added 8,400 jobs in the social assistance sector including care services for the elderly and disabled. Average private sector weekly pay in the latter industry is only $340.

Overall, the recovery is a mixed story for job quality in the state. Growth in factory jobs re-solidifies Kentucky as a leading manufacturing state, as does related growth in transportation and warehousing. But gains in some low-wage service sectors and the rise of contingent employment across the economy mean some Kentuckians are taking on jobs that don’t pay well or provide the economic security they seek.

Source: KCEP analysis of Bureau of Labor Statistics Current Employment Statistics data. Wage data in blog are latest available from the Quarterly Census of Employment and Wages.

Despite Good Growth in 2015, Erosion Still Hurting Revenue

The good news is Kentucky’s economy grew faster in budget year 2015, and tax revenue grew with it — by $505 million, or 5.3 percent, compared to budget year 2014. Individual income growth, high corporate profits, increases in consumer spending and a strong stock market contributed to the new revenue.

Nominally, individual income taxes grew the most, by $320 million (8.5 percent). Relatively, corporate income taxes grew the most by 11.2 percent ($53 million). The sales tax also grew by $136 million, or 4.4 percent.

The bad news is erosion in our state tax system, widespread needs in the budget and the necessity of putting much more money into our underfunded employee pension systems mean that economic growth is not nearly enough to right Kentucky’s fiscal ship. The graph below depicts a long-term downward trend in which the revenue we have to invest in P-12 education, our state universities and community colleges, health care, public safety and other services is not keeping up with our economy, even during good times.

Source: KCEP analysis of data from Bureau of Economic Analysis, Office of the State Budget Director.

That’s important because to sustain a certain level of investment in our kids, workforce and communities, revenue needs to roughly keep pace with economic growth in order to stay in line with the cost of providing public services. If revenue decreases relative to the economy, as the above trend shows Kentucky’s revenue has done over the last few decades, then the quality and quantity of those investments are affected.

More recently, the data show that revenue has stagnated as a share of the economy since the recession, and that even 2015’s strong revenue growth wasn’t enough to improve that ratio. In 2015, revenue was 5.9% of state personal income. In 1991, a year after the General Assembly passed the Kentucky Education Reform Act (KERA) with tax increases to generate new money for more equitable, quality K-12 education, revenue was 7.3 percent of personal income. And while that may not seem like a big difference, in a $170 billion economy it equals about $2.5 billion less in state tax revenue. As a result, Kentucky finds it hard to even sustain the investments in education and other areas we have committed to support.

The reasons for the trend are clear. Large income tax deductions and exemptions that primarily benefit higher-income people leave the state with hundreds of millions of dollars less each year. Likewise, proliferating business tax incentives and corporate tax loopholes do not pay for themselves.

Another big reason is that our tax laws haven’t kept up with a fundamentally changing state and economy. Even though people are buying more services and less goods, the vast majority of services are exempt from the sales tax in Kentucky. And as our population ages, Kentucky’s generous retirement income tax exclusion is growing more costly.

Kentucky will develop new revenue forecasts for this year and the next two budget years in the coming months. An interim forecast released by the state last week predicts growth of only 3.2 percent in the first three quarters of the new fiscal year, less than last year’s 4.1 percent over that same time period.