The next hit for small businesses in the pandemic: rising unemployment insurance premiums

After a year of unprecedented challenges brought on by COVID-19, local small business owners continue to deal with the aftershocks of the pandemic’s hit to the economy. One of those aftershocks has yet to be felt: rising unemployment insurance rates for years to come.

With nearly 900,000 initial claims made since mid-March 2020, Colorado’s unemployment insurance trust fund, which started the year at $1.1 billion, went insolvent by August. The state will look to a number of places to repay this deficit, including federal funding and employers.

In a typical year, this fund is replenished by charging employers an unemployment tax rate, with fluctuating premiums based on an employer’s experience rate and on the overall health of the unemployment insurance trust fund and the economy. The experience rate is determined by a number of factors, including payroll size, industry, wages subjected to premiums, how much employees claimed in benefits the previous year and more.

According to the Colorado Department of Labor and Employment’s 2020 report on the state of the unemployment trust fund, “As layoffs rise during the course of a recession, benefit charging also increases, and the experience-rate process shifts more businesses toward higher premium rates.”

Which, after a trying year for many industries such hospitality and tourism-based businesses, those higher premiums on the horizon could have further devastating effects.

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“Increases in premiums have the potential to be devastating to the restaurant industry, and will present a significant roadblock to the path for economic recovery,” said Sonia Riggs, CEO of the Colorado Restaurant Association. “This is even more heartbreaking when you consider that the mass layoffs that led to these increases occurred due to no fault of the industry itself, and yet the industry and the larger business community will be forced to pay the price to fund the currently insolvent unemployment trust fund.”

This holds true for local employers as well. Especially considering that unemployment in Eagle County peaked last year at 21 percent in April 2020 — 8.8 percent higher than the statewide peak of 12.2 percent during the same month.

Local restaurant owner Matt Morgan certainly went through the gauntlet this past year.

“We are a conservative restaurant, we’re well established, we are financially strong with no debt or that sort of thing,” said Morgan, who owns both Sweet Basil and Mountain Standard in Vail. “Because so much was unknown, we eliminated all payroll, including mine and everyone else’s. And said, ’Everyone get to the unemployment line, we have no idea what is going to happen here, we’ll see what happens.’”

Navigating layoffs, closures, unemployment, Paycheck Protection Program loans, capacity restraints and more during the past year, Morgan has just begun to see the light at the end of the tunnel and hopes summer will bring some sense of normalcy.

However, as with everything else, this year has been anything by typical.

Colorado relied heavily on federal funds this past year to repay the state fund’s deficit and pay unemployment claims. It is estimated that the state owes the feds close to $1 billion, a number which continues to increase. This loan is interest free until Sept. 6. And while the state implemented a number of safeguards to protect employers from having to pay these inflated premiums now, there are many questions as to how long this will last.

The CDLE 2020 report on the unemployment insurance trust fund noted that even while the department seeks to provide relief for employers on their premiums, “this action will have negative, although indeterminate, consequences for fund solvency.”

“Any options we explore will have the unified goal of helping the entire state build back stronger,” said Jessica Hudgins Smith, press secretary of the Division of Unemployment Insurance at CDLE.

Unemployment insurance relief

In the last year, the CDLE leveraged executive orders, stimulus packages and legislation to safeguard both employers, employees and to keep the fund functioning.

Per an executive order made on March 20, 2020, coronavirus-related claims do not count against an employer’s experience rating, which is one factor affecting premiums. The other factor, a rating of the fund’s solvency, will continue to impact rates.

“Those two ratings are combined (with other factors) to assess employer premiums, so if a business had a bad employer rating before this crisis hit, their premium may increase even more significantly,” Riggs said.

Another piece of legislation, SB20-207, passed on July 14, 2020 and provides additional unemployment insurance support. For one, it froze the maximum taxable wage at $13,600 in 2021 and then will increase this wage base to $30,600 by 2026. This is the wage that rates are assessed against to determine the premium due.

“Doing so changes the structure of the fund from a deficit-financing arrangement to a more desirable forward-financing structure,” said Ryan Gedney, senior economist at the Colorado Department of Labor and Employment.

SB20-207 also suspended the solvency surcharge for 2021 and 2022, meaning employers won’t see the impact of this until 2023. The solvency surcharge triggers when the trust fund balance dips below a certain level and remains in effect until the balance goes above a certain level. Even with this surcharge, employers can still see higher premium rates, Gedney said.

In attempting to postpone of minimize the effect on employers, CDLE is seeking further federal funds from the American Rescue Plan.

“Without a legislative fix to backfill the completely insolvent UI trust fund, businesses will see a burdensome increase to employer contribution rates,” Riggs said.

This is a move supported by a number of statewide and local organizations.

“There’s a whole group of us advocating for the use of the stimulus money to backfill the unemployment insurance account so that it doesn’t impact our business community through higher premiums,” said Chris Romer, president and CEO of the Vail Valley Partnership. “I think keeping the fees stable for as long as possible is a very appropriate use of those stimulus funds.”

Even still, “employers would not see the benefits (lower premium rates) of injecting money directly into the trust fund for several years down the road,” said Hudgins Smith. “CDLE is working closely with the Governor’s Office and legislative leadership to identify opportunities that best utilize the new expected Federal stimulus funds from the American Rescue Plan for both claimants and employers in the UI system.”

Preliminary estimates suggest that $2.6 billion of the funds from the American Rescue Plan will be allocated to unemployment.This stimulus plan also extends the unemployment benefits originally provided by the CAREs Act in 2020 through Sept. 6, 2021.

The future of unemployment insurance

Premium rates for 2021 were calculated prior to October 2020. Many rate notices went out in Nov. and Dec. 2020, with corrected 2021-premium rate notices mailed in March 2021.

“We have already heard anecdotally from some restaurateurs that their premiums have increased by up to $4,000 per month,” Riggs said. “Many businesses will see similar rate increases.”

And this trend might continue many years into the future, even with all the protections put into place.

“Premium rates will remain elevated compared to what they were pre-pandemic,” Gedney said. “Employers should be aware that it is highly likely that the premium rate for next year will experience another increase and move to the highest rate based on the anticipated reserve ratio in the trust fund as of June 30, 2021.”

Even as the economy recovers, the impact of the pandemic on unemployment and unemployment insurance will continue for many years.

“It’s hard to say what new impacts the pandemic might have on UI in the future, but some of the changes we’ve made over the last year — such as our fraud prevention measures — will continue beyond the pandemic,” Gedney said. “We know we are not out of the woods yet, but as vaccine distribution continues to increase across the state, we expect to see more and more businesses open at increased capacity, employers to increase hiring and the economy begin to recover.”

For employers, like Morgan, much is still unknown about the future.

“Our business is challenging enough as it is, with notoriously thin margins, and we’ve been able to be successful and I think we still will be. But any increase out there certainly erodes the profitability and the strength of our business and any business,” he said. “If unemployment insurance goes up a percent or two and there are a lot of other things like the expanded family and medical leave is kicking in, and right now there’s COVID-19 sick pay, and the Healthy Families and Workplaces Act — all of those represent added expenses — so it could be pretty tricky, pretty nasty in the next year or two if all of these things, perfect storm, come together.”