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State Finances

### Executive Summary

#### Key Objectives
- Examine agency's response to the COVID-19 pandemic.
- Evaluate efficacy of resources available for delivery of services, including IT infrastructure.
- Examine occurrence of fraudulent findings.
- Examine opportunities to better meet constituent needs.

The State’s unemployment system, managed by the Oklahoma Employment Security Commission (OESC), has a critical function: to not only provide unemployment insurance (UI) to laid-off workers but to also maintain trust fund stability to pay out those benefits. At the end of every fiscal year, the agency calculates the next year’s unemployment insurance tax rate based on the ratio of benefits paid out to the balance of the fund itself, with different rates resulting from different quotients. In addition to this tax assessment, there is also a 33.3% surcharge that is statutorily determined and implemented quarterly should the balance of the fund ever fall below $25 million. In September 2020, OESC announced a tax rate increase from a maximum of 5.5% to a maximum of 7.5%.

Through this limited-scope evaluation, the Legislative Office of Fiscal Transparency (LOFT) sought to provide clarification to the Legislature regarding the impact of coronavirus on the state’s unemployment insurance trust fund, the unemployment tax environment, and any process improvements that could result in better outcomes for Oklahoma.

#### Finding 1: There was little opportunity to prepare for the unprecedented demand, new federal guidance, and high-risk environment created by the pandemic.

The impact of coronavirus on unemployment cannot be overstated. Peak unemployment resulting from the virus was more than twice the peak unemployment from the Great Recession in 2007-2009. Regionally, Oklahoma went from the lowest unemployment in January 2020 to one of the highest in March and April. Relative to its neighbors, Oklahoma had the highest jump from January to March. This increase in the number of unemployment claims was impacted by the growing number of fraudulent claims experienced nationwide.

LOFT’s analysis reveals that the unemployment insurance tax rate increase, effective on January 1, 2021, would have been difficult to avoid. The amount of benefits paid out and the balance of the fund, both factors in the tax rate determination formula, were adversely impacted in 2020.

Although federal loans are available to struggling states, the federal Department of Labor requires states to exhaust available resources before applying. To date, $100 million dollars have been received in Coronavirus Relief Funds to stabilize the unemployment insurance trust fund and prevent the statutorily mandated 33.3% surcharge from being assessed on employers.

**Policy Considerations**
- Allow for bonding to support the Unemployment Insurance trust fund. The State may consider instituting a cap on bond issuance, like Arkansas, or allowing debt issuance only under emergency declarations.
- Consider tying the $25 million surcharge trigger to an index, such as total benefits paid out. Utilizing a static threshold will make no difference in good years and blunt the impact in bad years.
- Create a response plan for economic events that requires analysis of the State’s Unemployment Insurance trust fund, and that prioritizes use of federal economic aid for stabilizing the balance to minimize tax increases.

#### Finding 2: OESC responded to the pandemic as well as conditions allowed.
Over the past several fiscal years, OESC has served more constituents while its budget has remained relatively flat. The United States Department of Labor data indicates that Oklahoma’s payment promptness, an indicator of quality, was high: 93.25% of first payments were made within three weeks, above the US DOL-mandated 87%. This number has varied in 2020 due to coronavirus for not only Oklahoma but neighboring states as well.

OESC has accelerated long-planned systems upgrades due to coronavirus. These overhauls include fraud prevention, workflow automation, and digital claim management, allowing the agency to respond to another economic disruption more deftly. These upgrades are paid for by a technology upgrade fund established in 2017 and capped at $39 million.

**Policy Considerations**
Consider a dedicated and appropriately controlled technology upgrade fund for all state agencies to proactively strategize updates to key government services in times of distress.

#### Finding 3: Oklahoma’s unemployment insurance fund remains at risk.

LOFT’s analysis indicates that the unemployment insurance trust fund will need another $669 million to prevent the highest tax rate increase from being calculated at the end of FY2021. There are other types of unemployment insurance programs that Oklahoma could pursue to ensure that needs of Oklahoma’s unemployed are met and that the trust fund remains stable.

**Policy Considerations**
Consider alternatives to traditional UI programs like Short-Term Compensation (in which employers scale back hours with UI making up the difference) and Self-Employment Assistance (in which UI claimants are encouraged to start their own businesses).

Executive Summary

OESC Report

Report

Report & Resources

### Summary of Policy Considerations
To increase the probability of accurately addressing the needs of Oklahoma, LOFT’s recommendations include increasing flexibility for maintaining a healthy trust fund balance and delivering services, prioritizing investment, and indexing surcharge-trigger amounts. LOFT suggests the following recommendations be implemented:

![unemployment-recommendations.png](https://dy8iim215g2zo.cloudfront.net/unemployment_recommendations_f833adeb91.png)

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