States Running Out of Unemployment Funds

This is seriously not good, particularly since extending unemployment benefits is one of the preferred mechanisms for economic stimulus (unlike other ways of getting money to citizens, this mechanism is likely to lead to pretty much all being spent, which is the object of the exercise).

Now some way will be found to make sure the checks keep coming, rest assured. But we are not far into this downturn (despite the NBER having tagged it as being a year old). Unemployment is sure to rise further, and odds are decent it will remain at elevated levels till at least well into 2010.

So this is yet another indicator of how strained the collective finances are, in this case state government.

From the New York Times:

With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments.

Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months, according to the National Association of State Workforce Agencies. Funds in two states, Indiana and Michigan, have already dried up, and both states are borrowing from the federal government to make payments to the unemployed….

“You don’t expect the loans to happen this early in a jobs slump,” said Andrew Stettner, the deputy director of the National Employment Law Project, an advocacy organization for low-wage workers. “You would expect that the states should, even when they are not well prepared, to have savings.”

The Labor Department said last week that initial applications for jobless benefits rose to 573,000, the highest reading since November 1982. It is recommended that states keep at least one year of peak-level benefits in their trusts, but many have not, and already some states are far worse off than others…

The situation puts states, many of them facing huge deficits, in an even tighter vise. As more people lose their jobs, the revenue base that the benefits are drawn from shrinks, making it harder to pay claims. Adding to that burden is that states will eventually have to pay back what they borrow….

States that come up short have the option of borrowing from the federal government, but if the loan is not paid back within the federal fiscal year, 4.7 percent interest is accrued, which cuts into states’ general funds…

In many cases, states that have kept unemployment tax rates artificially low — or in some instances decreased them — find themselves in the worst pickle now. Indiana legislators, for example, reduced the tax rates to businesses by 25 percent in 2001….

To recalibrate the balance, several states are raising taxes on businesses — often through an automatic increase that is triggered when fund levels are endangered — to keep the unemployment checks flowing…

“Many states have not raised that tax in years,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington. “Some states have automatic triggers. But then of course you have businesses saying, ‘Whoa, you are raising taxes on me when we are having a tough time and it is a recession, too.’ ”

Still, some said they were thinking beyond the dollars.

“In these times of financial stress every extra cost is a concern,” said Linda Shelton, the spokeswoman for Lifespan, a large health care system in Rhode Island. “However there are many things that worry us even more. We are much more concerned about Rhode Island’s budget crisis, about rising unemployment, the rising number of uninsured and the continuing cuts to health care.”

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  1. Richard Kline

    Many states haven’t raised _any_ taxes for the support of unemployment insurance for years, business taxes or otherwise. This has all been about ideology and who profits now. Keeping taxes low while expecting the Fed to goose up down turns means that big players get the money now while the public gets the expense later.

    Everything abount money in this country is sick. The thinking is, weird, asocial. We needed to pad unemployment in the good times to have capacity for bad times. Instead, we shortchanged the system in the ‘good times’ while lying to ourselves that it would only be good times henceforth because, well, we were right with God. *hmmph*

    The entire way we fund and dispense unemployment funds needs extensive reform, like every other aspect of public finance.

  2. russell1200

    I don’t think we are “early”, it is just that employment is a lagging indicator. Which unfortunately means it won’t likely be getting better until we are clearly coming out of the downturn.

  3. eh

    Is Bernanke’s number in the white pages? In the future all states should either 1) change their name to AIG, or 2) engage in lots of risky financial hookups with Goldman Sachs — or whatever company the current Treasury Secretary happens to be have been most closely associated with formerly — as the counterparty. Preferably both.

  4. Jojo

    There was a good story HERE on this subject a few months back.

    The root of the problem (from the article) is this:

    California employers pay unemployment taxes based on a percentage of the first $7,000 of an employee’s annual wages, the minimum allowed by the federal government. Their tax rates vary depending on the stability of their workforces, with the maximum rate — 6.2 percent — generating $434 a year per worker.

    Emily Clayton, policy coordinator for the California Labor Federation, said the fact that employers pay taxes on only the first $7,000 in wages is the root of the fund’s financial problems.

    “In 1983, that $7,000 represented about a third of the average wage,” she said. “Today that represents about an eighth of the average wage. It’s clearly not kept pace with wages and inflation in the state.

    “By all rights, the employers should be paying enough into the fund to make the fund solvent.”

  5. Anonymous

    Every city and every state pretty much celebrated the bubble economy with their own unsustainable spending bubble. Welcome to the other side of the mountain, world.

  6. Guttersnipe

    Unemployment insurance trust fund replenishment factors generally lag economic activity by a year or two. With a steady rise in unemployment and a corresponding decrease in business activity the UI tax rates will likely increase significantly in 2010 barring a miraculous turnaround in 2009. As in the early 1980’s numerous states are likely to require federal loans to continue benefits payments.

  7. Anonymous

    It’s funny…if I got laid off I would have enough savings to last about 8 months. Why is no one bringing up the point that a lot of this is the individuals fault. “Oh poor Mr. Jones he has no job. Maybe he can live in his boat, RV or Hummer. How will he ever pay his $30,000 in credit card debt?”

    Lets do away with unemployment altogether and start saving our money. People in tough times could look to charities for and outs. We are a nation of beggars…

  8. Anonymous

    We are not a nation of beggars. We are getting back what we already paid for in taxes. It’s our own money, that we are getting back.

  9. Anonymous

    Getting a check for 3 or 6 months can be a life saver while looking for other work.

    Wonder how many States raided the trust funds to pay general obligations?

    Doubt if any trust has the funds or planned to pay out for a year or two.

    It’s gonna get scary as time marches on.

  10. Anonymous

    In CA at least, the state unemployment fund seems to be a reasonably fairly priced insurance plan. Probably too fairly priced.

    Businesses surely benefit from the ability to lay off workers at will without the feeling they are dooming their workers to instant penury. Bear in mind that many businesses lay off & then re-hire the exact same people later. The absence, or mitigation at least, of ill-will from these experienced workers is worth paying a little bit for.

    Unemployment benefits are not charity & they are also not a substitute for savings.

    Lots of hard-working people are unlucky enough to be born into a scenario where the best they can do for themselves is be a disposable worker living paycheck to paycheck.


  11. Mara

    Raided trust funds should be cause for jail–talk about fiduciary irresponsibility. Of course, that sets the precedent for a lot of congresscritters to go “up the river” for their raids on SocSec too.
    My druthers would be to can the whole wretched mess and cut all of the taxes. Tho my folks put in 50 years of work (and mom’s still working) they can’t look to the state for any help with my dad, who’s now wheelchair-bound, though I’m sure they’ve sunk many tens of thousands into Calif’s and fed’s endless maws of taxation. So you end up paying for benefits, but effectively you still end up paying for stuff yourself, and the amount received is so small as to render it useless. We won’t even consider the time factor in dealing with the intractable bureacracy intended to stop anyone from actually collecting said benefits.

  12. Anonymous

    The Congress has extend the UI benefits twice now, just as recently as this month (approved a few months ago). I believe that is six months worth of extensions beyond what the some States paid and people exhausted.

  13. Anonymous

    dont we, as employees pay into unemployment insurance? so, if 100% of employees pay into UI, and what-8% of people are unemployed (not sure of exact percentage) how in the hell are states running out of funds? not to mention you only get benefits from the last two years. where is this money?!

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