From the Expert: Back to Black: States Cut Unemployment Benefits

E-newsletter Issue #70 | May 26, 2011

States owe a whopping $40 billion in loans to the feds so they can continue to pay unemployment benefits to unemployed residents. Now, states are faced with bringing their unemployment programs back in the black, and several states are considering or are implementing cuts to unemployment benefits alongside tax increases. 

While unemployment rates have dropped slightly in many states—46 states and the District of Columbia reported a decrease in their rates for April compared to the year before, three states posted increases and one state reported no change—states continue to struggle to pay unemployment benefits and keep their unemployment insurance trust funds afloat.

As of May 19, 28 states plus the Virgin Islands were borrowing from the Federal Unemployment Account to help pay increasing claims for unemployment insurance benefits, with outstanding loans totaling more than $40 billion. The Department of Labor has estimated that up to 40 states may need to borrow as much as $65 million from the federal government before state programs can regain stability, and it could take states a decade or more to pay off the debt.

California, Pennsylvania and Michigan are the top borrowers of federal funds, with a combined total of more than $17.8 billion in loans.

To regain solvency in their unemployment accounts, states have three basic options in the short term: Raise revenues coming into the fund, cut the benefits going out or change the way the fund is financed. Until recently, most states have opted toward the first option—raising revenues by increasing tax rates and taxable wage bases.

A survey by National Association of State Workforce Agencies reports some good news. For a second year in a row, a majority of states are projecting their unemployment insurance tax revenue will increase this year.  Those projected increases range from a low of 0.1 percent in Alabama to a high of 135 percent in South Carolina, with a weighted average increase of around 16.5 percent.

While many states have raised taxes over the past several years to fund their faltering unemployment accounts, it is helpful to look at these increases within a historical context. According to the National Association of State Workforce Agencies, the average tax rate on total wages paid by employers is still relatively low by past standards. In 1938 the average national unemployment insurance tax rate was 2.69 percent of total wages.  In 2010, that rate was 0.98 percent—a 64 percent drop.

Now, however, a few states are looking at the other side of the equation to balance unemployment accounts—cutting back benefits to the unemployed. 

Michigan—which owes more than $3 billion in unemployment loans and where unemployment rates were elevated even before the Great Recession was in full swing—became the first state to begin making cuts earlier this year. In March, Gov. Rick Snyder signed a bill that reduces the maximum number of weeks for state unemployment benefits from the usual 26 weeks to 20 weeks, but only for new applicants in 2012.

Missouri took similar steps last month, also cutting back the number of benefit weeks to 20 weeks, but the changes will affect new applicants immediately, instead of next year, as in Michigan. Missouri has borrowed slightly more than $672 million from the federal government and had an unemployment rate of 8.9 percent in April. Arkansas recently cut back to 25 weeks of eligibility. 

Several more states—including South Carolina, Utah, North Carolina, Tennessee, Florida, Pennsylvania and Wisconsin—have recently considered or continue to debate measures that could negatively affect the number of weeks the unemployed receive benefits, either state or federal.  Including state and extended federal benefits, those who are unemployed may qualify for up to 99 weeks of benefits, depending on where they live, with a national average weekly benefit of around $300. 

By this fall, states that have borrowed from the federal government will have to begin paying interest on their unemployment loans. For Michigan, that means a hefty $117 million interest payment when the state’s budget is already stretched thin. And as other states that have borrowed funds near the interest deadline, it may spur another round of cuts to benefits. 

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