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Unemployment Insurance Tax Schedules and Solvency in Oregon
The tax schedule that is in effect for a given calendar year is determined by provisions of Oregon Unemployment Insurance law (ORS 657.459) and is directly dependent on the solvency of the Unemployment Insurance (UI) Trust Fund.
Trust Fund solvency is based on the general principle of insurance and is established in such a way that the Employment Department can finance Unemployment Insurance Benefits over a period of business cycles without going into debt. Experience from past recessions has shown that benefits paid out during an entire recession period are one and one-half to two times a one year benefit cost rate. Therefore, a 1.5 reserve multiple, or enough reserves to pay benefits for 18 months, is used to determine UI Trust Fund solvency.
In order to keep the Trust Fund solvent we have 8 tax schedules and each September we determine which tax schedule will go into effect for the following calendar year. Schedule IV (the long term goal) should be activated when the trust fund balance is sufficient in size to cover whichever amount is larger: 150 percent of the costs of the "high cost period" during the last 10 years or 150 percent of the costs of a 5.6% Insured Unemployment Rate (IUR). HB 2127 became effective on January 1, 2006. This Bill was introduced by the Oregon Employment Department during 2005 Legislative Session which changed the solvency requirement by basing the required Trust Fund balance on the amount needed to pay 18 months of UI benefits in a period with a 5.6% IUR, rather than a 7% IUR.
Tax Schedules I, II, and III reduce tax rates to bring the Trust Fund level down. Tax Schedules V, VI, VII, and VIII increase tax rates to rebuild the Trust Fund to a level that covers the cos ts during the next economic downturn period.
Oregon law provides two formulas to determine which tax schedule to use in the coming year.
The first formula is the "Ten Year High Cost Formula." In this formula the Adjusted UI Benefits are generated by identifying the highest total unemployment insurance benefits paid during any twelve consecutive-month period during the last ten years. This number is adjusted for the growth in average wages and covered employment.
The second formula is called the "5.6 Percent Insured Unemployment Formula". This formula is designed to approximate the amount of benefits that would be paid out if the insured unemployment rate rose to 5.6 percent. The Adjusted UI Benefits is calculated as the average monthly employment during the previous calendar year times the adjusted weekly check amount times 3 weeks.
Based on the Oregon employment law we first choose the greatest of the Adjusted UI Benefits paid from Formula I or Formula II, then divide this number by the End of August Trust Fund Balance to generate a ratio which is called the Fund Adequacy Percentage (FAP) Ratio. Using this ratio we determine which Tax Schedule is in effect for the coming year.
This year, according to Oregon law, we are using the "5.6% Insured Unemployment Formula " and have calculated a FAP Ratio of 192.51%. As a result, Tax Schedule II will be in effect for Calendar year 2008. Using Tax Schedule II instead of III will cause an overall $79 million reduction in UI taxes for CY 2008.
Table 1 shows the Fund Adequacy Percentage (FAP) Ratio for Table I through VIII.
Table1
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Fund Adequacy Percentage
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Ratio
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I
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200% and Over
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II
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190% but less than 200%
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III
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170% but less than 190%
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IV
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145% but less than 170%
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V
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125% but less than 145%
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VI
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110% but less than 125%
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VII
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100% but less than 110%
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VIII
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Under 100%
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In setting individual employer tax rates Oregon uses a system of array allocation. That is, each tax schedule has a number of tax brackets and employers are ranked according to their benefit ratios and placed into one of these tax brackets. The weighted average of the statutory tax rate for Tax Schedule II is about 1.73% with taxes ranging from .7% to 5.4%.
Ahmad Rostamizadeh, Actuary
Oregon Employment Department
Article added 11/15/2007
2008 Tax Rates
For the year 2008 the tax rates for Tax Schedule II are as follows:
Taxable minimum rate 0.7%
Taxable maximum rate 5.4%
Taxable base rate 2.1%
The taxable wage base for 2008 will be 30,200.
Article added 11/15/2007
Oregon Employers save
Oregon employers will save $79 million in UI taxes in CY 2008 due to upcoming changes in the tax rate schedule. As of January 2008, Oregon employers will be assessed under Rate Schedule 2, which means they will be charged an average of 1.73% instead of 1.97%. A portion of this $79 million tax reduction, about $12 million, will go to new employers. The new employer taxes will be reduced 25% , from 2.8% (pre HB 2127 level) to 2.1%.
We are moving from Tax Schedule 3 to 2 due to HB 2127, which was introduced by Governor Kulongoski and passed during the 2005 legislative session. Without HB 2127 we would be using Tax Schedule 4 instead of 3 in 2007 and then Tax Schedule 3 instead of 2 in CY 2008. For 2009 we forecast that we will move to Tax Schedule 3 which would have been Tax Schedule 4 without HB 2127. All these tax reductions are taking place because HB 2127 changed the solvency (sufficient reserves) criteria for the UI program.
Oregon uses 8 tax schedules to adjust employer tax rates based on the solvency of the UI trust fund. Movement between the eight schedules of tax rates represents a self balancing aspect of Oregon's UI Trust Fund law. Each schedule has a range of tax rates and an employer's rate depends on his or her previous UI payments.
Article added 11/15/2007
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