State Unemployment Insurance Trust Funds: June 2011 Update

Unemployment rates remain high and many people have been without work for extremely long periods of time, exhausting state unemployment trust funds quickly. More than half the states are borrowing from the federal government to cover costs, which could affect future fiscal stability.

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Sustained high unemployment rates, long-term unemployment and unsustainable funding models have exhausted state unemployment trust funds quickly.

  • In 2010, the national unemployment rate was 9.6 percent and forecasters predict that rate will hover around 9 percent throughout the rest of 2011. Moderate improvements to about 8 percent are expected in 2012. 
  • In May 2011, the national unemployment rate was 9.1 percent, up slightly from April. Twenty-four states reported a decrease in their unemployment rate in May over April, 13 states and the District of Columbia reported increases, and 13 had no change.
  • 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.
  • Throughout the economic downturn, the number of long-term unemployed, defined as those unemployed for 27 weeks or more, has skyrocketed. In May 2011, the number of long-term unemployed workers increased by 361,000 to 6.2 million. That translates to almost half—45.1 percent—of all those unemployed; that’s the highest percentage since the Labor Department began calculating the rate in 1948.
  • Based on U.S. Department of Labor reports, the average amount of time individuals received unemployment benefits was 39.7 weeks in May 2011—more than double the average duration of unemployment when the recession began in December 2007.1
More states are borrowing from the federal government to cover costs.
  • At the end of January 2010, 26 states 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 mid-June 2011, 29 states plus the Virgin Islands had borrowed more than $41 billion, down from 32 states borrowing $45.7 billion in March 2011. The Labor Department estimates by the fourth quarter of 2013, as many as 40 states may need to borrow more than $90 billion to fund their unemployment programs and it will take a decade or more to pay off the debt.
  • California and Pennsylvania are the top borrowers of federal funds, with a combined total of more than $14.7 billion in loans. Michigan is close behind, currently borrowing $3.2 billion, but also has been borrowing the longest, since September 2006. 
State borrowing may have consequences on future fiscal health.
  • Until the end of 2010, a provision in the American Recovery and Reinvestment Act delayed interest from accruing on state unemployment loans. That provision has expired and interest payments will become due in September 2011 at a rate of nearly 4.1 percent. 
  • President Obama’s 2012 budget, unveiled in February, included a provision that would give states a two-year respite from automatic tax increases and interest payments on unemployment insurance loans. It is unclear, however, whether that proposal will gain traction in Congress.
  • Failure to extend an interest or tax-increase moratorium could jeopardize or stall the economic recovery. States have and will continue to raise state taxes on employers to regain trust fund solvency and to avoid automatic federal tax increases.
Notes:
1 The shift in long-term unemployment is so unprecedented that the Bureau of Labor Statistics and the Census Bureau have modified the way they collect information about the unemployed. Before this year, these agencies only collected data for unemployment duration of two years or less, with those unemployed more than two years reporting “two years or more”. Beginning January 2011, that measure has been extended to capture those that have been unemployed up to five years or more. It should be noted that this affects the accuracy of year-over-year comparisons of the average duration of unemployment.