The state’s economist says unemployment may hit double digits in Tennessee within a year, placing a greater strain on the fund that covers jobless claims.

University of Tennessee economist Bill Fox told a joint legislative committee today that state’s jobless rate will hit likely hit ten percent. It sits now at 7.9 percent.

“But 7.9 percent is higher than we hit in the last recession. In fact, you have to go back more than twenty years to find an unemployment rate as high as it is now. And it’s just started on its way up.”

To handle rising claims, Fox told lawmakers that the state’s unemployment compensation trust fund needs to be built up to $1.2 billion.

“Trust fund’s down to about $360 million, which is insufficient to pay the benefits that it will be called upon to pay, over the course of the next three years. Unless we do some kind of a fix, it will be necessary for the state to borrow money from the federal government.”

Employers pay premiums into the trust fund, which distributes jobless benefits. To avoid borrowing money from the federal government, Fox says the state either can increase employer premiums, raise the base amount on which those premiums are set, or cut benefits.

WEB EXTRA

If Tennessee’s unemployment insurance trust fund has to borrow money from the federal government to continue to pay benefits to people who have lost their jobs, Fox says payback is a fact of economic life.

“Well we have to pay it back, if we borrow money from the federal government. So if we, in fact, are in a position where we borrow, than we have sort of a double whammy on the other side of this. Because we have to pay back what we owe the federal government, and then we have to rebuild the trust fund balance to something over a billion dollars. So it make even that more challenging the problem of getting the trust fund to where it needs to be to pay off benefits in the future.”

To avoid borrowing money, Fox says the state has three options

Option 1

“Well they [the state] can cut benefits. I don’t think that’s a very legitimate option in a recession as severe as this one. So the other ones [options] are basically to raise more revenue.”

And Fox sees those as the two best options:

Option 2

“First of all, to increase this premium rate, which I said will average about 2.7 percent. How high it is depends upon how well you’ve operated in the past, in terms of, experience with the trust fund. If your firm is one that results in a lot of layoffs and high benefits being paid, then you pay a higher premium rate, because you ‘re paying for the benefits of your employees.”

For instance, a small insurance office with a history of very few layoffs pays a low rate. A construction company that rides out a boom and bust cycle pays higher rates. Fox says that average could be boosted to 3.3 percent or 3.4 percent.

Another option is raising the base amount on which premiums are set.

Option 3

“Now let me remind you, that’s on the first seven thousand dollars of earnings. An alternative, which most other states follow, is to broaden out that base against which that premium tax is paid. Instead of the first $7000 of income, the first nine, or the first 10 thousand, would be another way to solve the problem.”

The cost is not strictly a cost to employers, the economist warns. Typically, when an employer pays higher unemployment premium, real wages stay flat. Fox says that means that workers also are indirectly paying the cost of the premium.

To see Dr. Bill Fox’s presentation to the state legislature’s Joint Study Committee on Business Taxes, go to this archived video on the state web page.