Tough Decisions on Jobless Funds

State eNews Issue #31, March 3, 2010

It’s no secret: During this recession, record numbers of workers who lost jobs are drawing benefits from state unemployment funds. Many states are feeling the pinch. In fact, the U.S. Senate approved legislation Tuesday night that extends federal emergency unemployment benefits for workers who have exhausted their basic state unemployment benefits.

But that won’t resolve the dire unemployment insurance situation.

In Ohio, it’s been more than a year since the state drained its jobless fund—forcing it to borrow money from the federal government just to make sure the state could pay benefits to the unemployed, according to The Columbus Dispatch. The debt for Ohio’s unemployment fund is more than $2 billion and growing, the newspaper reports, and state officials are wondering what to do to fix the problem.

By year’s end Ohio will owe the U.S. Treasury—through the federal fund from which the state is borrowing—an estimated $3 billion if no action is taken, according to The Columbus Dispatch. Interest payments on that loan will begin to accrue next year and are projected at $120 million a year, the newspaper reports. The state is grappling with how to pay it all back.

In Kentucky, Gov. Steve Beshear formed the Unemployment Insurance Task Force last March to deal with the state’s jobless fund that’s running out of cash.

In fact, many states are wondering how to fix these problems. Many states were forced to borrow money from the federal government just to keep jobless funds afloat—and starting next year, states will have to start paying interest on those massive loans.

“The task is daunting,” said George Wentworth, unemployment insurance modernization coordinator and policy analyst with the National Employment Law Project.

As states look for ways to get jobless funds back in the black, states are raising employer taxes, cutting unemployment benefits and increasing the amount of a worker’s wages employers must pay taxes on.

So if the current situation sounds like taxes, taxes and more taxes, stay tuned, there’s still more news.

According to Wentworth, automatic triggers both on some state levels and on the federal level will have employers paying more in taxes if problems with unemployment insurance funds aren’t solved.

First, the smaller federal unemployment tax could increase. Employers currently pay $56 per worker for the federal tax—that goes to replenishing the federal pot of money states are now borrowing from to keep unemployment insurance funds afloat.

Two years after a state borrows money from the feds to pay jobless workers, if the state still hasn’t paid back the money, employers in that state will pay an additional $21 per worker, Wentworth said.

There are other automatic increases in state taxes if a state’s jobless fund is still in the red.

“Employers are typically going to see their state unemployment taxes rise as sort of a natural result of this recession,” Wentworth said.

When state unemployment funds go in the red, state unemployment taxes are impacted in two ways. First, employers’ tax rates are calculated based on how many layoffs employers had during the prior three years. Employers who have had the most unemployment claims filed against their accounts get the highest tax rates. Second, in many states, there’s another automatic increase in unemployment taxes for all employers if a state’s jobless fund goes broke.

But that’s not the end of it.

The real danger, according to Wentworth, is that if states don’t fix their unemployment insurance funds and get them back in the black, they won’t be prepared for the next recession.

Wentworth said that’s what got most states into this mess.

“It’s definitely a national solvency crisis,” Wentworth said. “States were not as prepared as they could be. A lot of states took measures to keep their tax rates low, basically in response to employers’ claims that they needed to keep taxes low in order to not be an impediment to job creation.

“A lot of states just did not have in place the necessary finance structures to weather this recession,” Wentworth said.

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