How Kentucky Missed Out On A $90 Million Unemployment Upgrade

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After the 2008 recession revealed the weaknesses of the nation’s unemployment insurance systems, most states got to work upgrading their technology.

The need for such an overhaul was obvious, and the reason the federal government set aside $7 billion in 2009 to modernize the nation’s unemployment systems.

Forty states took the free money. But Kentucky left it on the table. 

The commonwealth missed out on a cool $90 million back then. But experts say the failure to bring Kentucky’s unemployment insurance system into the 21st century is costing Kentucky to this day.

A task force appointed by then-Gov. Steve Beshear prioritized stabilizing the struggling unemployment insurance trust fund over improving the old infrastructure. It scheduled incremental tax increases on businesses, cut benefits and delayed major system upgrades until the state’s fiscal situation improved.

In January, Gov. Andy Beshear — Steve Beshear’s son — began taking steps to replace the technology. But the state was still using a program that predates the personal computer when the coronavirus ushered in a new employment crisis.

Delays were likely inevitable regardless of the technology as Kentucky dealt with unprecedented numbers of new claims, but those seeking help to get through the pandemic dealt with crashing websites, frustrating tech issues and outdated information in the application that the state conceded was difficult to bring up to date. Delayed claims mean a worker without income to support their family. It also means fewer federal unemployment dollars circulating in Kentucky’s economy.

“Especially what we’ve seen now during this pandemic is that states with terrible systems that couldn’t get people through, they lost out on a lot of federal money,” said Michele Evermore, a policy expert at the National Employment Law Project and a member of President-elect Joe Biden’s transition team (although she wasn’t speaking in that capacity). “All for the sake of pinching pennies between recessions.”

Already, signs point towards another cost-cutting approach. Kentucky’s largely Republican legislature wants to insulate businesses from tax increases, and Beshear has already committed spending upwards of $300 million of federal CARES Act funding to pay down the $865 million federal loan Kentucky required in June.

Kevin Kinnaird, a spokesperson for the Kentucky Labor Cabinet, said the Office of Unemployment Insurance’s legislative priorities include investing in the current “archaic” system “to be more efficient and responsive to unemployed Kentuckians” as well as increasing the number of staff.

“The problem is we keep prioritizing keeping business taxes low at the expense of dislocated workers and our economy when we hit hard times,” said Jason Bailey, executive director of the Kentucky Center for Economic Policy. 

Policymakers often keep unemployment insurance systems out of sight, out of mind during good times, when fewer people are exposed to its flaws, he said. Recessions put unemployment insurance in the spotlight and provide the best opportunity for policymakers to invest in improvements. 

“My fear,” Bailey said, “is that they are going to go the other direction.”

The Recession

The Great Recession put so many Kentuckians out of work by 2009 that the state needed a $972 million loan from the federal government to keep paying unemployment claims.

Nearly every state required such a loan. They had until 2012 to pay it off, or the federal government would automatically increase business wage taxes.

In Kentucky, this meant taxes would increase on businesses by .3% every year after 2012.

At the same time, states were running unemployment systems on technology that predated the personal computer. Old policies left many workers without unemployment benefits, should they lose their job.

So the American Recovery and Reinvestment Act provided states with $90 million each if they adopted reforms to cover more part-time, seasonal workers and anyone leaving a job for a compelling personal reason, such as domestic violence or a family move.

The incentives could be used to pay benefits or to cover administrative costs — such as modernizing the technology powering the unemployment program.

Then-governor Steve Beshear put the decision to a task force chaired by Helen Mountjoy, who was Secretary of the Kentucky Secretary of Education and Workforce Development, the cabinet that housed the unemployment office until this year. Other members included Sen. David Givens, (R-Greensburg); David Meyer, a vice president of UPS; representatives from the Kentucky Chamber of Commerce and labor unions; and Larry Roberts, who was director of the Kentucky State Building and Construction Trades Council.

Roberts would become Kentucky’s Labor Cabinet Secretary in 2013 under the elder Beshear. Andy Beshear named him to the post again this year — and the Labor Cabinet took reins of the unemployment office during the pandemic.

Roberts declined to be interviewed through a spokesperson, who said the secretary was “dedicated to ensuring Kentucky’s Office of Unemployment Insurance is being responsive to Kentuckians in need during this pandemic.”

The task force met 11 times before its final opinion was turned into legislation, passed by the general assembly and signed by Steve Beshear.

The task force made 17 recommendations, including reducing benefits from 68% of lost wages to 62% and establishing a week-long delay between approval and the first payment. The waiting week is supposed to save money by avoiding paying benefits too soon, allowing time for documents to be mailed and staff to manually calculate benefits.

As for the federal incentives, the task force concluded even though the money would more than cover the technology upgrade, the long-term costs of policies expanding coverage outweighed the immediate $90 million reward.

Sen. Givens said focusing on steps the task force didn’t make, such as the modernization efforts, was “inappropriate.” The goal, he said, was bringing the unemployment insurance trust fund to solvency through a plan that businesses, conservative politicians and labor activists could agree to.

“It was a very very lengthy, educational process, followed by a very thorough and rigorous negotiation between competing interests,” Givens said.

What’s Happening Now

This year’s pandemic in 2020 found Kentucky’s unemployment insurance system still lagging behind other states in both technology and unemployment funding.

Kentucky’s Office of Unemployment Insurance reports over 75,000 claims are outstanding. More than 600 claims are from people who have been trying to collect unemployment insurance benefits since March.

And the state covered far fewer unemployed people than the national average: Only 19% of unemployed people in Kentucky were covered by unemployment insurance because the rest had exhausted their benefits, left the workforce or worked a part time or contract job that didn’t qualify.

Coverage increased when the pandemic hit, as Kentucky adopted many of the changes recommended by the federal government.

Gov. Andy Beshear waived the waiting week nearly immediately to get money to claimants as quickly as possible. And some of the same changes first proposed in 2009 were included in emergency legislation Kentucky passed in March in order to unlock federal unemployment funding in the CARES Act.

The unemployment office has not followed through on all those upgrades, however.

For example, the 2009 task force passed on incentives that required adopting the “alternative base period,” which uses earnings from a worker’s most recent economic quarter to determine eligibility. Currently, a worker’s most recent earnings often aren’t counted.

Lawmakers gave the unemployment office the option to use this alternative base period when it passed Senate Bill 150, but Kinnaird, the Labor Cabinet spokesperson, said the unemployment office has not implemented the policy.

The emergency legislation also gave the unemployment office permission to establish a program to cover reduced hours with unemployment benefits, another recession-era reform that would allow employees to keep more people on the payroll. The CARES Act committed the federal government to fund up to half the costs of creating this program.

The office drew up regulations under the Education and Workforce Development Cabinet, but the plans were scrapped once the Labor Cabinet took over.

Kinnaird said “the statutory scheme is not in place to provide the framework or authorization for this program” because the federal government required a permanent program rather than a temporary one set up by emergency legislation.

Givens, who is now in Republican leadership, said he would not support making major changes to the unemployment program right now, though he agreed the system is “obviously antiquated.”

The legislature recognized this in 2018 when it created a separate fund to divert a portion of unemployment taxes into and save up for an eventual technology upgrade. The fund has five years to raise $60 million, according to the statute. By the end of 2019, the state had saved $16 million.

Givens said one of his priorities is to protect people who were approved for unemployment insurance only to be deemed retroactively ineligible and sent an overpayment bill. As the Kentucky Center for Investigative Reporting found, many in Kentucky applied for unemployment benefits after Beshear said those who “self-quarantined” for fear of the coronavirus would be eligible. The state later backtracked, sticking those who had self-quarantined with overpayment debt, and blamed shifting guidance from the federal government for the mistaken payments.

The state has already requested a waiver from the federal government to forgive this debt, and Kinnaird from the Labor Cabinet said they have not received a response to the request. Givens said he is waiting to see if the waiver is approved before pursuing a legislative fix.

“We have a lot of needs right now and one of those most important needs is to keep people employed,” Givens said.

Dan Borsch, who owns the Old Louisville Tavern and Burger Boy Diner, said he’s concerned about future tax increases when uncertainty is at an all-time high.

“I want to say it’s not make or break but who knows exactly how much business is going to come back and how fixed costs are going to be six months from now,” Borsch said. “It all adds up.”

Borsch said the unemployment system is clearly outdated and needlessly adversarial, pitting employers against their employees. And since Kentucky made contract and gig-economy workers eligible for unemployment benefits, Borsch said businesses like his with traditional employees foot the bill for companies like Uber that don’t pay unemployment taxes.

“I’m concerned that it is going to be a large expense going forward,” Borsch said, “and it’s just frustrating that we don’t have a better system.”

Bailey of the Kentucky Center for Economy Policy says the unemployment taxes paid by Kentucky businesses are already historically low, but he worries the current recession will usher in another round of benefit cuts without addressing the holes in the unemployment system.

“What we should be doing in this next legislative session is learning the lessons from this and putting in the improvements that are needed for next time,” Bailey said. “This is not our last pandemic, and it’s not our last recession. One way or the other, more problems are coming.”

This story was updated to clarify that Evermore was speaking in her capacity at the National Employment Law Project, not as a member of the Presidential transition team.

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