Hawaii’s capacity to pay unemployment benefits is forecast to drop this year after two years of federal bailouts, prompting legislation to use state taxpayer revenue to shore up the safety net typically supported by businesses.

The state Department of Labor and Industrial Relations expects its unemployment insurance trust fund will fall 51% by the end of this year, to $58 million from an estimated $119 million at the end of last year with some claims pending.

A $58 million balance pales in comparison to the fund’s $601 million pre-pandemic balance, and would be the fourth-lowest level in over 30 years — there was a negative balance in 2010, a paltry $19 million in 2011 and a negative balance in 2020 that was reversed largely with federal aid.

To pump up the fund’s capacity, state lawmakers introduced several bills this year, including one that would create a back-up fund to the regular fund, and a few that would infuse the unemployment fund with taxpayer revenue. A couple of bills also aim to avert an impending spike in unemployment insurance tax rates for businesses.

One of the supplemental funding bills, introduced at the request of Gov. David Ige, would deposit an unspecified amount of state general fund revenue into the unemployment fund.

This measure, Senate Bill 3129, has so far drawn divergent views from a few large organizations representing employers and employees.

The Hawaii Food Industry Association, representing over 200 companies in the food and beverage sector, supports the bill.

“The last two years have presented our local workers, businesses, and economy with unprecedented challenges,” Lauren Zirbel, the organization’s executive director, said in written testimony at two Senate committee hearings in January and February. “The Unemployment Compensation Trust Fund was not originally created or structured to handle the type of economic turmoil we have seen. An appropriation is necessary in order to help stabilize the fund.”

Another local trade association, Retail Merchants of Hawaii, urged passage of the bill, citing hardship among many of its members stemming from pandemic-­related sales declines as well as higher costs due to supply chain disruptions, inflation and even the war in Ukraine.

“Retailers are doing everything possible to keep their doors open and their employees employed,” Tina Yamaki, the organization’s president, said in written testimony for a Thursday hearing on the bill. “Measures like this one would be a huge help in their recovery.”

UNITE HERE! Local 5, a union representing over 11,500 Hawaii workers in the hotel, food service and health care industries, opposes the bill it calls a bailout for businesses.

“There are no strings attached, and no requirements for employers to ultimately cover the cost of this cash infusion, as is their responsibility,” the union said in written testimony.

DLIR supports the bill. “This measure will allow an inflow of cash into the Unemployment Compensation Trust Fund to mitigate the impact of the (employer unemployment tax) rate for 2023 and moving forward,” Anne Perreira-Eustaquio, the agency’s director, said at a recent hearing.

SB 3129 cleared the Senate in a 24-0 vote March 8 and unanimously passed an initial House committee hearing Thursday.

However, neither the agency nor lawmakers have discussed in public hearings how much general state revenue may be put into the fund.

A bill in the House proposed a $300 million deposit. But this measure, House Bill 1852, stalled after not getting a hearing in the House Finance Committee after passing two other committees.

A $300 million deposit would automatically reduce the tax rate for employer contributions by three levels next year, according to DLIR.

Yet another bill proposes creating an emergency reserve to the unemployment fund.

Back-up fund

This measure, HB 2469, doesn’t specify a sum to be deposited into a new “unemployment compensation insolvency special fund” that could be drawn upon to pay unemployment claims if the governor declares an emergency and the state finance director determines that the normal unemployment fund balance is insufficient to pay claims.

HB 2469 sailed through three House committee hearings, and on March 3 passed the full House in a 45-3 vote despite no affirmative support from DLIR and a negative view from the nonprofit Tax Foundation of Hawaii and the state Department of Budget and Finance.

The only supportive testimony for HB 2469 came from the food industry association.

Craig Hirai, Budget and Finance director, said in written testimony that his agency doesn’t see a need for such a special fund because current law has provisions to address unemployment fund insolvency.

Part of the safety net allows states to cover shortfalls with borrowings from the U.S. Treasury, which happened two years ago when effects from the pandemic sent Hawaii’s unemployment rate to a record 22.4% in April 2020 from 2.2% the month before.

Paying an avalanche of unemployment claims caused the fund’s balance to plummet from $601 million in 2019 to negative $646 million in 2020. Hawaii officials were able to fully repay the federal lending without interest using federal coronavirus aid, and the fund’s balance rebounded to $119 million last year.

An initial round of federal aid included $47 million put into the fund in 2020, followed by $800 million from a second round last year.

The Tax Foundation said in written testimony that the state already has a general “rainy day” account — the Emergency and Budget Reserve Fund — and discouraged the creation of another one.

“If we allow rainy day funds to proliferate, there will be that much more money sitting around and doing nothing, waiting for the next emergency to hit,” the organization said. “With more of these beasts sitting around in various places, it gets more difficult to keep track of them, and by the same token it is harder to figure out how much money the state really has.”

The three “no” votes in the House on HB 2469 were from Reps. Jeanne Kapela (D, Naalehu-Captain Cook-Keauhou), Dale Kobayashi (D, Manoa-Punahou- Moiliili) and Val Okimoto (R, Mililani-­Mililani Mauka-­Waipio Acres).

“There’s a reason why, if you look at the general ledger of any private-sector company, you don’t see any accounts, or let’s say, a rainy day fund,” Kobayashi said during a Feb. 3 House Labor and Tourism Committee meeting. “And that’s because it doesn’t really make sense to take a bunch of money and put it away waiting for some emergency to happen. Now there seems to be some general consensus here that that is a good idea to do in government. So we’ve set something up … the rainy day fund, and I don’t believe we should be creating other rainy day funds for any purposes.”

On Wednesday, the Senate Committee on Labor, Culture and the Arts advanced the measure further in a 5-0 vote after amending HB 2469 so that the proposed unemployment insolvency special fund could be raided for other uses during an economic emergency if approved by a two-thirds vote of the Legislature.

Sen. Brian Taniguchi (D, Makiki-Tantalus-Manoa) said during the committee hearing, which he led as chair, that he’d like to see more discussion on the bill now headed for consideration by the Senate Ways and Means Committee.

“I think if we do have another crisis with unemployment insurance, although we can borrow money into the fund, we probably may not be getting any federal aid,” he said.

Averting a spike

One other big change lawmakers are pursuing to alter the unemployment fund’s balance would extend a shield protecting businesses from an impending inordinate increase in unemployment insurance taxes.

Vehicles to do this, HB 2471 and SB 3128, would disarm an automatic spike in the tax contribution rate pegged in part to a peak one-year unemployment benefit expense in a 10-year period. Because of claim expenses in 2020, a statutory formula is set to boost tax rates so that the fund’s balance balloons to $1.77 billion next year, according to DLIR.

Lawmakers last year provided a similar adjustment to avoid the spike last year and this year. The two pending bills would extend the adjustment through 2030 so that tax rates would elevate the fund’s balance to $568 million next year, in line with a more normal high balance.

DLIR’s Perreira-Eustaquio offered strong support for what she called a very important relief mechanism that still builds up the unemployment fund with business tax contributions.

“This relief will allow contributory employers to replenish the Unemployment Compensation Trust Fund and help reestablish the fund’s integrity without facing the highest contribution schedules for years as Hawaii’s economy continues to recover,” she told two committees on Tuesday and Wednesday.

The House Labor and Tourism Committee unanimously passed SB 3128 Tuesday after the measure cleared the Senate on March 8 in a 24-0 vote. The companion measure, HB 2471, passed the House on March 3 in a 48-1 vote and on Wednesday cleared the Senate Committee on Labor, Culture and the Arts with unanimous approval.

These two bills are now headed for additional committee hearings.

Meanwhile, Hawaii’s unemployment rate is projected by the state Department of Business, Economic Development and Tourism to average 4% this year, then dip to 3.5% next year, followed by smaller downward ticks to 3.2% in 2024 and 2.8% in 2025.