State government’s Unemployment Insurance Advisory Council moved gradually during 2016 toward a final position on reducing the tax rates charged to most South Dakota employers.
On May 9, 2016, council members received a briefing on three ways to calculate the solvency of South Dakota’s unemployment-insurance trust fund. Reserve ratio measures the trust-fund balance against total wages. A high-cost multiple uses the highest historical benefit-cost rate during a 12-month period. Average high-cost ratio uses the three highest benefit-cost rates during the last three recessions or the past 20 years.
Marcia Hultman, who is state government’s secretary of labor and regulation, recommended to council members that South Dakota use an average high-cost multiple of 1.5 or higher. According to the minutes from the May 9 meeting, “An AHCM of 1.5 means the trust fund could pay out one and a half years of benefits during a moderate recession without receiving any additional revenue.”
The council’s consensus that day was to start with an average high-cost multiple of 1.5 to 1.75 as the starting point. “Development of a new tax rate/reserve ratio structure will be based on this target and further discussion will be held by the Council at the next meeting,” the minutes said.
At the council’s next meeting July 19, 2016, the council agreed to using 1.6 as the average high-cost multiple.
When the council gathered again Sept. 22, secretary Hultman and Pauline Heier, director for state government’s unemployment division, proposed an annual tax-rating process that would reduce the current tax rates when the average high-cost multiplier reached or exceeded 1.6 on June 30 of any given year.
“Rates for the following year would then be reduced by a set amount for all employers,” the Sept. 22 meeting minutes said.
The council met once more Oct. 19. That day secretary Hultman presented an overview of Gov. Dennis Daugaard’s administration’s proposal that would be submitted to the Legislature in 2017. The tax reduction would be coupled with an administrative fee proposal that had died in the state House of Representatives in the 2016 session.
The combination legislation, HB 1097, met resistance again over the $3 charge per employee. The tax reduction sweetened the taste, however. House members, led by Rep. David Anderson, R-Hurley, voted 49-19 for the package after turning aside an amendment offered by Rep. Mark Willadsen, R-Sioux Falls.
The Associated General Contractors of South Dakota’s lobbyist, Deb Mortenson, changed from an opponent to a supporter when the legislation came up for a hearing in the Senate Commerce Committee. Mortenson said she had been assured by Daugaard officials the $3 fee would receive an annual review. The legislation still failed during its first vote in the Senate, receiving 20 ayes and 12 nays, when 24 ayes were needed.
That first Senate vote came Feb. 27. One week later, the Senate took a second vote. This time it passed 25-9.
Changing from nays to ayes were Democrats Troy Heinert of Mission and Billie Sutton of Burke; and Republicans Jeff Monroe of Pierre and Neal Tapio of Watertown.
Also voting aye the second time were two senators, Republican Blake Curd of Sioux Falls and Democrat Kevin Killer of Pine Ridge, who weren’t present for the first vote. Switching from aye to nay was Republican Jenna Netherton of Sioux Falls.
This Friday, June 30, will mark the first time the average high-cost multiple will be calculated. Heier told council members Monday that the most recent ratio was 1.67. Hultman said employers would receive their 2018 tax notices in October. She expects the tax cut will be $4.4 million to $5 million for 2018.
The tax reduction will slow down the growth in the unemployment trust fund.
The projection is the fund will finish calendar 2017 with $122.1 million. Employer contributions and interest are estimated to be about $41.2 million in calendar 2017, while benefits are forecast to be about $30.3 million.
That would change in 2018 to about $35 million from contributions and interest and about $31 million flowing back out in benefits.
The expected effect is the trust balance would taper its growth to $126 million by the end of calendar 2018.