In the decade since the Great Recession, Michigan employers built up one of the healthiest unemployment insurance funds in the country.
But even $4.6 billion might not be enough to withstand the onslaught of coronavirus shutdown-induced jobless claims from quickly bleeding the fund dry.
Michigan's unemployment trust fund, which took nine years to build up, could be drained in a matter of six months if nearly 1 million jobless workers draw benefits for an average of 19.4 weeks, according to a new analysis from the W.E. Upjohn Institute for Employment Research.
Michigan entered the coronavirus pandemic's economic upheaval with a better-funded unemployment insurance trust fund than any of the nation's 10 most populous states and far ahead of its Great Lakes peers.
A Crain's analysis shows that Michigan's $4.6 billion unemployment fund had more cash on hand at the outset of the public health crisis than Ohio, Indiana and Illinois combined — and twice as much savings as New York state before the pandemic shut down America's largest city.
The fund's solvency level is both a result of a decade of steady economic growth and austerity measures that critics say went too far in curtailing the social safety net of workers who lose their jobs through no fault of their own.
Democratic Gov. Gretchen Whitmer's forced mass closures of businesses in March to stop the spread of COVID-19 triggered an unprecedented onslaught of unemployment claims that are depleting the trust fund by at least $245 million a week, according to state data provided to Crain's.
"We feel (the trust fund) is in good financial shape, but obviously the longer this goes and the more claims that come in, the more concerning it gets," Whitmer said Thursday.
At the outset of the crisis, Whitmer used her emergency powers to extend unemployment benefits from 20 weeks to 26, reversing one of the controversial austerity measures her Republican predecessor put in place nine years ago. Whitmer did not increase the maximum weekly benefit, which hasn't been raised in 18 years.
The Upjohn Institute, a Kalamazoo-based think tank, projects that sustained high unemployment caused by government-ordered business shutdowns and a slow recovery over three quarters could run up a $9.2 billion bill for unemployment benefits by next March.
Some of that drain on the fund would be replenished by the roughly $1.2 billion Michigan employers pay into the fund annually, resulting in a new unemployment debt of $3.4 billion, said Christopher Leary, senior economist at the Upjohn Institute for Employment Research.
"You're going to have to start planning to borrow in the middle of July," Leary said.
The Upjohn Institute's analysis assumes the state's average weekly unemployment benefit of $325. The $9.2 billion one-year estimate for state unemployment benefits doesn't account for a potential second wave of jobless claims if there's a new coronavirus outbreak this fall that triggers another round of shutdowns, Leary said.
As recent history shows, borrowing from the federal government to pay unemployment benefits during an economic recession can create a long-term financial burden for employers, who have to pay more on their unemployment insurance to make up the difference.
In December, just three months before the coronavirus pandemic hit Michigan, the state paid off its unemployment debt, piled up during the Great Recession, by retiring $3.2 billion in bonds that were issued in 2011 to spread out the cost for employers.
Michigan businesses were relieved of a $65 to $217 per employee special assessment to pay off the debt from the 2008-2009 national recession. Michigan entered the Great Recession with just $40 million in the trust fund, enough to pay one week's worth of unemployment compensation for 110,000 jobless workers.
"We learned the hard way during the Great Recession that you can blow through billions of dollars in a short period of time," said Wendy Block, vice president for business advocacy and member engagement for the Michigan Chamber of Commerce. "You can see pretty quickly that $4.6 billion will get you far, but it won't get you very far."
Before the pandemic, Michigan had a 3.6 percent unemployment rate in the month of February, a 20-year low for a labor force of 4.9 million workers.
Between March 15 and May 2, 1.33 million workers in Michigan filed unemployment claims, an onslaught of workers seeking aid that has overwhelmed the state agency. However, not all of those claims will draw on the $4.6 billion state trust fund.
The federal CARES Act extended unemployment eligibility to self-employed and gig economy workers and established a new $600 per week pandemic benefit for all workers. Congress also extended unemployment for workers who have exhausted their benefits by an additional 13 weeks.
Between March 15 and April 24, the Unemployment Insurance Agency paid out $1.66 billion in benefits, but $1.14 billion was federal funds, according to the state agency.
"We've got a million claimants right now ... but not all of them are going to be funded by the state," Anderson said.
Michigan's state trust fund for unemployment insurance is funded solely by employers through a tax on the first $9,000 of earnings for each employee.
Tax rates range from 2.7 percent to 10.3 percent, depending on an employer's history of layoffs over the previous three years. For example, seasonal construction businesses that lay off workers in the winter typically pay an unemployment tax of about 8 percent, Anderson said.
In recent years, the fund has benefited from a growing economy and limits on benefits. Illinois, Indiana and Ohio combined had unemployment funds totaling $4.1 billion. Minnesota and Wisconsin's trust funds combined were $1 billion less than Michigan, a Crain's analysis shows.
"In nine years' time, we went from being in one of the worst positions in the nation to one of the best positions in the nation," Block said.
Michigan didn't get there by accident.
In 2011, then-Gov. Rick Snyder and the Republican-controlled Legislature made Michigan one of the first states in the nation to reduce the length of time a worker could claim unemployment from 26 weeks to 20. Eight other states followed suit, with Florida and North Carolina cutting their weeks to 12.
Given the health of Michigan's trust fund, it shows "those reforms worked," Block said.
After declaring a state of emergency that gives her the power to temporarily change laws, Whitmer restored Michigan's unemployment to 26 weeks through executive order.
Democratic lawmakers and the Michigan League for Public Policy are now pushing for making the governor's temporary extension permanent.
"It never should have been reduced," said Gilda Jacobs, CEO of the Michigan League for Public Policy.
Michigan's $362 maximum benefit also is the lowest of any Great Lakes state and has been locked in by law since 2002. With a national average of $468 per week, Michigan's weekly unemployment benefit is the ninth-lowest in the country, federal data show.
"$362 just doesn't cut it anymore," said state Rep. Terry Sabo, a Muskegon Democrat who has a bill to increase the weekly benefit to $542. "It's outdated, it needs to be updated — just with the cost-of-living increases that we've had over the years."
Jacobs' group proposed a weekly unemployment benefit of $593 or 58 percent of average weekly wages, a benchmark used until the early 1990s.
"The Legislature changes things when the economy is good and nobody is looking down the road to when the economy may not be so good," said Jacobs, a former Democratic lawmaker from Huntington Woods.
Jacobs said the extended jobless benefits that Congress made available for the first time to self-employed and contract employees should be added to the state program going forward.
"They were never a part of the job market the way they are," Jacobs said. "We need to build in unemployment protections for that part of the economy, which is growing."
Whitmer is gradually reopening the economy, which should make unemployment claims decline in the coming weeks. Construction sectors restarted last week. Manufacturers can restart production Monday, while the Detroit Three automakers will be limited to 25 percent capacity in assembly plants on May 18.
But what makes the coronavirus economic downturn different is the mechanism the state normally uses to recoup trust-fund losses from claims has been suspended.
Whitmer's mandatory shutdown orders exempted businesses from being assessed an "experience" rating tied to their UI tax for their employees' unemployment claims because March and April's mass layoffs were caused by the governor's actions, not a normal loss of business during an economic recession.
"So many of these (current) layoffs are the result of government efforts to protect public health, which kind of amounts to a subsidy from healthy employers to financially distressed employers," said Evan Anderson, the chief strategist of the Unemployment Insurance Agency. "It's cost mutualization, not cost capping."
Holding businesses harmless of higher unemployment taxes now could make it harder to rebuild the trust fund's reserves for the next economic calamity, Leary said.
Another factor is Michigan's unemployment tax is capped at the first $9,000 of income. Michigan's taxable wage base mirrors Ohio ($9,000) and is close to Indiana ($9,500), but is far below Wisconsin's $14,000 taxable base, which is the national median, a Crain's analysis shows.
"Michigan's taxable wage base is discrimination against low-wage workers. It's too low," Leary said. "The low tax base hinders our ability to recover reserves after the crisis."
It's also unknown whether the U.S. Department of Labor will ultimately allow states to not assess a higher tax rate on businesses that were forced to lay off workers in mass, Block said.
"The system is supposed to be experience rated and now we're saying, 'Oh, now it all should be socialized,'" Block said. "I think you have to return to charging at some point — federal law requires it."
This story was produced in part with funding from the Ravitch Fiscal Reporting Program at the Newmark Graduate School of Journalism at CUNY and is part of a nationwide project on how state safety nets are handling the coronavirus economic fallout.
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