During 2004, the Trust Fund for Unemployment Insurance displayed continued weakening in the level of solvency sufficient to place the fund in “Condition D,” the highest tax table. The balance in the fund at the end of December 2004 was $450.5 million. Overall, employers in the state were charged an average contribution rate of 1.9 percent of taxable wages during 2004, while more than 68 percent of all experience-rated employers paid the minimum unemployment insurance tax rate of 0.3 percent for the year.
The Financing System
Oklahoma uses an experience-rating system to determine the contribution rate for each establishment covered by the Oklahoma Employment Security Act. The system is designed so an employer with few or no former employees claiming unemployment insurance benefits will have a contribution rate lower than an employer with many former employees filing against the system. Because the rates are assigned based on experience, there can be a lag of up to one year from the beginning of the unemployment experience until the employer’s contribution rate is adjusted and has an effect on the trust fund.
All employer contributions collected under the Oklahoma Employment Security Act, as well as interest earned on the fund balance, are deposited into a federally maintained unemployment insurance trust fund account specific to Oklahoma. This trust fund can only be used for the payment of benefits to eligible unemployed individuals. By state statute, the fund is supported solely by contributions from Oklahoma employers.
Current Fund Condition
During 2004, the trust fund suffered continued large benefit payouts at $195.9 million. Monthly benefit payments ranged from $12.1 million to $22.4 million and averaged about $3.8 million per week. At the same time, contributions to the trust fund averaged slightly less than $5.3 million per week. The net effect, with the addition of trust fund earnings, was an increase in the end-of-year trust fund balance of about $97.8 million to reach a total of $450.5 million by the end of December 2004.
The trust fund balance at the end of 2004 was about 3.1 percent of estimated taxable wages for the year. This widely used indicator of trust fund solvency was above the 2.7 percent experienced in 2003. A 5.0 percent ratio is generally regarded as adequate to ensure that funds will be available to pay unemployment benefits.
At nearly $451 million by the end of 2004, the trust fund also contained about 2.3 times the 2004 annual benefits, or about 27 months of benefits. This was well above the 15 months of benefits available at the end of 2003.
The high-cost multiple at the end of 2004 was 0.81. This measure of trust fund solvency compares current trust fund vitality with the fund’s highest 12-month benefit payout period. Generally, a level of 1.0 to 1.5 is considered by most economists to be sufficient to maintain solvency if faced by another similar period of severe unemployment.
Outlook And Future Solvency
In 2005, “Condition C” will be in effect, and preliminary data indicate the use of the “Condition C” tax table also in 2006. Under the “Condition C” table, the lowest employer contribution rate is 0.2 percent of taxable wages, and the maximum is 8.3 percent.
Current forecasts indicate the trust fund will increase to about $509 million by the end of 2005 with a high cost multiple of about 1.0. If the current economic recovery falters, total reserves in the trust fund will be lower and less solvent.