For years, Nevada has had an unemployment insurance trust fund which was solvent and able to meet any demands it may have had placed on it. As a result, our UI taxes were low and sometimes even minimal. So, if you were like me, you just breezed through that item on your annual budget. Those days are gone, at least for several years to come.
The Employment Security Department's Advisory Council recently had their annual meeting in which they make recommendations for the upcoming year's average UI tax rate. Except for a brief spike in the early 1980s, the average rate has been far below 2 percent, and in some years even below 1 percent. This was the result of careful management of the fund by the advisory council and the boom Nevada was experiencing during that time. However, with the current economic crisis came the downfall of the trust fund. The trust fund had a balance of over $800 million a few short years ago, now it needs to borrow $100 million per month just to pay UI benefits. As a result, the average UI tax rate must go up and it will most likely stay at an elevated level for the foreseeable future.
The recommendation of the advisory council is to raise the average UI tax rate from the current 1.33 percent to 2 percent. The administrator of the Employment Security Department will still have to adopt this increase and she probably will, as historically the council's recommendations have been adopted. But even with this increase, the trust fund will still sink another $295 million in the hole. The advisory council heard testimony to keep the average rate at 1.33 percent and to raise it as high as 3 percent. The 2 percent choice was clearly the advisory council's way of addressing the solvency issue without applying unreasonably high tax rates. The 2 percent average rate will likely be the standard for years to come until the fund again reaches solvency requirements. And by the way, the balance the trust fund needs to achieve in order to reach state solvency requirements is $1.09 billion. That's billion with a 'B'!
Now, back to the budget issue. One way of demonstrating the impact of this higher tax rate would be to take a reserve ratio of 5.5 percent (reserve ratio means the percentage ratio that the reserve balance bears to the average annual payroll of the employer). This reserve ratio on 2010's tax rate schedule would result in a 0.25 percent tax rate (0.3 percent when the CEP tax is added).
However, that same reserve ratio on 2011's recommended tax rate schedule would result in a 0.85 percent tax rate (0.9 percent when the CEP tax is added) or an increase of three times.
Not all employers will experience this dramatic of an increase and some employers may not see an increase at all. And as for 2012, we have no way of knowing if the rate will stay the same or again be increased. One thing is certain, this budget item warrants more attention now and in the future than perhaps it ever has. What was once a minimal tax now becomes something more substantial and in some case extremely significant. Businesses need to get used to this as it's likely to be this way for a long, long time.
James V. Nelson is executive director of the Nevada Association of Employers. Contact him through www.nae-online.org.
