From the Expert: State Jobless Funds Being Drained

E-newsletter Issue #50 | July 8, 2010

The fiscal impact of sustained high unemployment rates is painfully clear to all state policymakers. The length of time individuals are unemployed is also having a hugely detrimental impact on state and federal bottom lines and will likely continue to impact state fiscal stability long after the recession has passed.

This is especially true with the health of state unemployment insurance trust funds—those state funds used to pay unemployment benefits. Every month, more states are forced to borrow from the federal government to keep those trust funds afloat, and they must begin paying back those loans—with interest—as soon as Jan. 1, 2011.   

The President’s Council of Economic Advisors predicts unemployment rates will continue to hover around 10 percent throughout this year, with moderate improvements over the next two years—around 9 percent in 2011 and 8 percent in 2012. In addition, people are now receiving unemployment benefits and are remaining unemployed longer than before the recession. Based on U.S. Department of Labor reports, the average amount of time individuals received unemployment benefits was 34.4 weeks in May—more than double the average duration of unemployment when the recession began in December 2007.

Sustained high unemployment affects unemployment insurance trust funds in two primary ways: decreased supply and increased demand. More people need unemployment benefits for longer, increasing the money going out, while fewer people are paying into the reserves through payroll tax collections, draining the supply of funds coming in.

As a result, unemployment insurance trust funds are being drained at an alarming rate. At the end of 2007, states had $38.3 billion in trust reserves; that fell to $29.9 billion in December 2008 and to $14.2 billion by September 2009. To cover the gap between diminishing trust funds and increased demand, states are borrowing from the federal government.

At the end of January, 26 states plus the U.S. Virgin Islands were borrowing money from the Federal Unemployment Account to help pay increasing claims for unemployment insurance benefits, with outstanding loans then totaling more than $30 billion. By the end of May, 32 states were borrowing nearly $38 billion—a 26 percent increase in total borrowing in four months.

The Labor Department estimates up to 40 states may need to borrow more than $90 billion to fund their unemployment programs by the third quarter of 2013. California and Michigan are the top borrowers of federal funds, with a combined total of nearly $11 billion at the end of May.

Such large loans could have a significant impact on the future fiscal health of states. The American Recovery and Reinvestment Act includes a provision that delays interest from accruing on those loans until Dec. 31, 2010. If this provision had not been included, the interest rate charged to states for borrowing from the federal account would have been 4.64 percent in 2009. However, beginning Jan. 1, 2011, that provision will expire and states must begin paying interest on their loans.

Interest on borrowed funds cannot be paid back using unemployment insurance revenues. That means when the unemployment trust fund bill comes due, state payments will take a bite out of the money available for things like education and health care.

In order to slow the hemorrhaging of money from trust funds, a majority of states—35—increased taxes on employers in the 2010 fiscal year, and seven states enacted legislation to raise the taxable wage base on employers for unemployment taxes, according to a survey by the National Association of State Workforce Agencies.

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