DWD Releases Optimistic Projections of Unemployment Reserve Fund Condition

Friday, August 26, 2011 at 7:20 PM by

Will “Rosie Scenario” Once Again Prove to Be a Fickle Mistress?

The Unemployment Insurance Advisory Council met on Wednesday, August 24, and its agenda included a discussion of the nearly $1.4 billion deficit in the Unemployment Insurance (UI) Reserve Fund.  The Council’s staff from the Department of Workforce Development (DWD) presented their estimates of changes in the Reserve Fund over the next several years.

The latest projections make me think back to remarks made on the floor of the legislature more than 20 years ago by a former Speaker of the Assembly, Tom Loftus. I don’t recall very much about the debate, but I remember Loftus chiding his colleagues about the perils when balancing a budget of being seduced by a “fickle mistress” known as Rosie Scenario. I think his admonitions at that time are probably appropriate now, as we need to be careful not to fall under Rosie’s spell without taking care to make a sober assessment of reality.

The new DWD figures assume a negligible decrease in the Reserve Fund’s deficit in 2011, with the negative balance improving by only $13 million (1%), from about $1.39 billion at the beginning of the year. However, DWD projects the deficit will fall to $946 million at the end of 2012, and will turn into a positive balance of $397 million by the close of 2014!  In fairness to DWD, they routinely base their projections on the economic assumptions contained in the Department of Revenue’s quarterly economic report. The most recent of those reports is the May 2011 Economic Outlook, which was also used by the Legislative Fiscal Bureau in estimating taxes and spending in the 2011-13 budget bill.  Although those assumptions seemed quite reasonable at the time, they may need to be revised substantially in coming weeks or months.

The May Economic Outlook projects a Wisconsin unemployment rate falling steadily from 7.2% this year to 5.5% in 2014. The portion of the workforce that is unemployed and eligible for UI benefits is expected to drop sharply, from 3.4% this year to 2.0% in 2014. As those changes significantly reduce annual spending from the Reserve Fund (from almost $1.1 billion this year to less than $600 million in 2014), wage growth averaging about 4.6% per year over the next few years is expected to substantially boost taxable wages, and therefore UI tax revenue.

If those projections are reasonable estimates, the Advisory Council will be under considerably less pressure to develop a package of significant changes to UI financing and spending. However, economists have gotten much more pessimistic about the national economic prognosis since DOR issued its May Economic Outlook. Just this morning, the growth in the national Gross Domestic Product for the second quarter of 2011 was revised downward to 1.0% (from 1.3%), and the very modest economic progress seems to be slowing, not picking up. For example, as DWD recently reported, Wisconsin lost 12,500 private sector jobs in July, and the state’s seasonally adjusted unemployment rate has climbed from 7.5% in May to 7.8% over the last two months.

A new quarterly report should be released by DOR soon, and it could have worrisome implications for Wisconsin’s fiscal situation, including the state’s General Fund and especially the UI Reserve Fund (which is much more responsive than the General Fund to changes in unemployment rates).

We’ll be following this issue carefully over the coming months.

Jon Peacock

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