When legislators come to Olympia later this month, they will not only face a $6 billion budget deficit, they must also change our unemployment insurance (UI) system to comply with federal requirements.

Two years ago, the U.S. Dept of Labor said changes agreed to by labor unions and the bulk of Washington’s employer community did not pass muster.

The feds ordered the legislature to change state law to bring it into “conformity.”

The hub of the issue deals with the complicated formula by which workers, particularly those with seasonal jobs in construction and agriculture, qualify for unemployment.

The feds also questioned the formula used to tax employers, who pay unemployment taxes based on the unemployment rate in their business sector.

Because of the way UI tax rates are set, taxes on employers ratchet up each time companies cut back on the number of workers they employ.

As you can imagine, the problem becomes particularly acute during bad economic times such as today.

Washington’s unemployment fund reserves are healthy, but as the number of jobless workers increases, the reserve funds drain and legislators have one of three choices: raise UI taxes, change benefits, or borrow from the federal government.

This is a problem we have faced before.

In the economic downturn of the early 1980s, the state coffers emptied as Washington’s unemployment rate hit double digits.

Gov. John Spellman (R) and lawmakers formed a task force to reform our unemployment laws while borrowing money from the federal government to pay benefits. That strategy only compounded the state’s debt, because the borrowed funds had to be repaid with interest.

The task force had to come up with a formula that provided sufficient unemployment benefits without bankrupting employers in construction or agriculture, whose employees worked on a seasonal basis.

In the end, they tweaked the formula whereby “stable” employers with year-round workforces subsidized the rates charged to seasonal employers.

The Legislature has been struggling with our state’s unemployment insurance system for years.

When Boeing threatened to bolt in 2003 because of UI costs, lawmakers passed reforms, then later started reneging on them.

When employers complained, lawmakers, labor, and employers reached a compromise in 2005, but one business sector filed an objection with the Department of Labor and DOL overturned the compromise.

So, it is back to the drawing board for state lawmakers, in the midst of rising unemployment.

With more workers losing their jobs in our weak economy, legislators may propose increasing unemployment benefits and extending them beyond the traditional 26 weeks.

That sets up the possibility that UI taxes will increase if the recession is prolonged.

To get a preview of what may happen, just look at California.

The November unemployment rate was 8.4 percent and rising, and its UI reserve account will be empty in 2009.

To make matters worse, the state has 28 percent less money than it needs just to maintain current operations.

In fact, Gov. Arnold Schwarzenegger (R) may have to ask the federal government for a loan later this year just to pay UI benefits and employers are facing a UI increase of $56 to $416 per worker.

The situation in Washington could become even worse because our UI costs are higher. According to the Washington Alliance for a Competitive Economy (WashACE) 2008 Redbook, California’s unemployment costs per workers are $315, 18th highest in the nation.

Washington is second highest at $803. California’s average weekly benefit is $292, 16th highest. Washington is sixth highest, at $325.

Washington employers are already paying some of the highest UI costs in the nation. Raising taxes on employers could tip them over the edge.

Lawmakers need to find a solution that keeps employers in business. Legislators must:

• Carefully weigh the costs of what they do to ensure that the changes don’t kill jobs in the process.

• Avoid waiting until a last minute crisis when the UI reserve fund is empty.

• Avoid borrowing from the federal government to pay unemployment benefits. The interest alone on California’s federal loan is $20 milliion.

That just makes matters worse.

• Stop paying unemployment benefits to people who voluntarily quit their jobs.

In these hard times, we should reserve UI benefits for those who are out of work through no fault of their own.

Small businesses create the lion’s share of the jobs in our state. Main Street — not Wall Street — will drive our economic recovery.

Whatever solution is devised, we need to make sure those businesses stay sound.

Don Brunell is president of the

Association of Washington Business.