Minnesota unemployment fund reaches solvency as politicians weigh refunds

The political battle over whether to refund millions in unemployment taxes to Minnesota businesses has obscured the fact that the fund has just hit federally recommended levels for the first time ever.

That sobering revelation comes as the Minnesota House passed a measure Thursday to extend benefits for laid-off steel workers on the Iron Range but also return millions of dollars in unemployment insurance to employers.

For decades, the pool of money that Minnesotans rely on for help after they lose their jobs had fallen below the U.S. Department of Labor's recommended levels, in some years dramatically below. Those are calculated based on how much money the state would need to pay out in one year of a recession. Such amounts can be staggering: Minnesota paid out $1.7 billion in unemployment benefits in 2009 alone.

Republicans at the Capitol this year have pushed hardest to give some of the $1.6 billion balance in the fund back to the employers who pay into it as a condition of extending benefits for 26 weeks for laid-off Iron Range miners.

While they've stirred DFLers' fury by linking the two provisions in one bill, both sides have agreed to a proposal to give businesses that pay into the fund a one-time credit of $258 million and grant future unemployment tax reductions when the fund balance rises above the federally recommended level.

It's a wonky discussion, with tongue-stumbling phrases like "average high-cost multiple." But beyond the partisan debate and bureaucratic jargon is one of the more serious problems that states around the country are reckoning with as they try to avoid the mistakes they made in the last economic downturn. Some states have cut their unemployment benefits to shore up their funds; others are still in the red.

Minnesota and other states were forced to borrow money from the federal government because they didn't have enough in their funds to write unemployment checks. At the peak, Minnesota owed the federal government $776 million — and had to pay $18 million in interest, even after federal bailout legislation gave Minnesota a break on much of the borrowing costs.

It didn't surprise state officials. Nearly a decade before the last financial downturn, the state auditor warned that Minnesota could be forced to borrow money even in a mild recession like the one in the early 1990s.

Today, Minnesota's unemployment fund is in better condition than two-thirds of those in other states. But the Minnesota Department of Employment and Economic Development, the state agency that oversees the fund, has stressed the importance of keeping its balance at the federally recommended level. DEED officials have warned that being unprepared in a recession increases the likelihood of federal borrowing and interest payments, as well as higher federal taxes and state assessments on employers.

The agency disputed the characterization by some politicians that the fund has a "surplus," though House Speaker Kurt Daudt, R-Crown, repeated it as recently as Thursday at a news conference before the bill passed on the House floor.

Rick Caligiuri, DEED's director of unemployment insurance, told a House panel two weeks ago that the nation experiences a recession on average every eight years.

"We're eight years out from going into the next one," he said, reminding legislators that it took Minnesota nearly three years to pay back previous federal loans.

Though a recent economic forecast projected a softening of the economy in coming years, Minnesota is enjoying low unemployment rates. Advocates of the unemployment tax cuts, including business groups like the Chamber of Commerce, point out that the fund is protected by a trigger that automatically raises employers' contribution rates when reserves drop too low. They say it is only fair to give businesses back the excess money, which could spur economic growth.

The fund is projected to grow to $1.8 billion by the end of the year, mostly offsetting the proposed giveback to businesses. A spokeswoman for Senate Majority Leader Tom Bakk, DFL-Cook, said he cleared the newest proposal with DEED Commissioner Katie Clark Sieben and is still sensitive to memories of when the account had problems.

DFL Gov. Mark Dayton approved lower unemployment tax rates in 2014 after state officials saw the fund was headed toward solvency sooner than expected, even though it still wasn't at federally recommended levels.

Rep. Tim Mahoney, DFL-St. Paul, said members of his party absolutely insisted on a requirement that there be no more unemployment tax cuts that took the fund below the federal benchmark.

"It's not a goal, it's not an aspiration — it [would be] in the law," Mahoney said. "It doesn't matter which administration you have, whether it's Republican or Democrat."

Maya Rao • 651-925-5043