Virginia Should Reform Its Unemployment Insurance System

Virginia has a great opportunity to help unemployed workers and their families, and boost the state's economy -- and Virginia would get paid millions of dollars to do it. That's an offer the state's poli cymakers shouldn't leave on the table.

The recently enacted federal stimulus legislation provides Virginia with $188 million to reform the state's outdated unemployment insurance system. Sure there's a catch. The state would have to make specific changes. But the good news is that they are changes that will help the state do a better job of helping unemployed workers and their families make ends meet.

In fact, Virginia already implemented one key reform required for the federal money back in 2003 when it changed the rules to give workers credit for their most recent work in calculating unemployment benefits. It turns out that this change now makes the state eligible for almost $63 million in new federal funds. To get the remaining $125 million, the state needs to enact at least two other policies from among four options.

The options are to extend unemployment insurance coverage: (1) to those seeking part-time work (which helps those with heavy family obligations who want to work but just aren't available full-time); (2) to those forced to leave work for compelling family reasons, like a sick child or military relocation; (3) to workers enrolled in training programs for high-demand occupations; and (4) to provide an extra allowance to workers with dependent children.

THESE NEW federal incentives would fund the expanded benefits for a long time. For example, if Virginia covers part-time workers and those who have left a job for compelling family reasons, it is estimated that the money from Washington would pay for the cost of the reforms for more than 10 years.

An added benefit is that Virginia would receive the entire $188 million up front. This not only helps Virginia's unemployed families, but also provides relief to the commonwealth's employers because it might help delay a mandatory tax increase triggered when the state's Unemployment Insurance fund gets too low. In January, the Virginia Employment Commission reported the dire news that it expects the fund balance to fall below this trigger point by June.

It's important to point out that accepting the federal funding won't cost Virginia the flexibility to adjust its unemployment system when that money runs out. If Virginia enacts the required reforms, the state can still make whatever changes it feels are needed in the future, free to take into consideration the health of both the state's economy and its unemployment insurance trust fund. And if further help is needed down the road, it is possible that more federal relief will follow.

There's one more very compelling reason to do this. Expanding unemployment coverage puts money back into the state's economy at a time when consumer demand is plummeting. You don't need to be a Ph.D. economist to know that when a working man or woman is laid off, his or her family must adjust their purchasing to reflect their loss of income. That only makes this recession worse: As consumers cut back on what they buy, businesses face declining revenues and often find themselves needing to scale back employment, further reducing demand.

Expanded unemployment insurance benefits have the opposite effect. Laid-off workers use their unemployment benefits to buy food, clothing, and other necessities for their families -- and usually spend this money quickly and close to home, further boosting the economy. This means local businesses restock inventory, pay their own employees and suppliers, and everyone plays a part in bringing the recession to a halt.

MOODY'S INVESTORS Service has estimated that every dollar invested in extending unemployment benefits creates $1.64 in new economic activity. If Virginia adopts the changes needed to draw the additional $125 million in federal funds, $205 million in economic activity will be generated within the commonwealth.

Even without the recession, these changes are needed to make Virginia's out-of-date unemployment insurance system better fit the realities of the 21st century work force. Virginia's system lags in key areas. For example, last year just 26 percent of unemployed Virginians received any unemployment insurance benefits, the lowest rate of any state in our region and 30 percent below the national average. Only four other states extended benefits to fewer unemployed workers than Virginia.

Virginia owes it to its hard-working men and women -- as well as to employers and to the well-being of the economy as a whole -- to make these changes and take the money the federal government is offering. It's a low-cost way to fight back against tough times and invest in the state's future.

Michael Cassidy is executive director of The Commonwealth Institute for Fiscal Analysis, a Richmond-based organization founded to provide credible, independent, accessible information and analyses of Virginia fiscal issues. Contact him at .