The problem with extending unemployment

One little-mentioned fact about unemployment benefits is that state governments have obligations too – not just the federal government. The amount varies by state according to how generous they are but unemployment payments are a joint state/federal responsibility.  With the economy in the tank and unemployment at 9.5%, congress has extended unemployment benefits several times – from 26 weeks to 99 weeks. Not only has this discouraged people from finding work, it has also compelled many states to borrow money to cover their unemployment benefit obligations. Extending the benefits period has only put the states in a more precarious financial condition. (story here)

Since the current recession began, 31 states have borrowed just under $40 billion from the federal government to fill their depleted unemployment trust funds. It adds up to more borrowing for the programs than ever before, and it’s likely to balloon by year’s end. If interest rates projected at around 4 to 5 percent were added to that total amount, it would force states to pay an additional $1.6 to $2 billion currently unaccounted for. And that’s not the only additional fee that could be imposed. For every year the loans aren’t paid back, employers will lose at least 0.3 percent from the federal credit. That could mean that an employer’s tax rate of 1.1 percent would inflate to 1.4 percent.

For a state like Alabama, which has borrowed $283 million from the federal government so far, an upward bump in the economy could make repayment on time possible. But for harder-hit California — which is giving out $11 billion in unemployment benefits this year but only taking in $4.6 billion — it’s not. California would have to at least double its business tax to make up for the lost $6 billion.

Eleven states are currently borrowing in the billions from the federal unemployment relief fund. At over $7 billion, California alone makes up nearly a fifth of the total. Many of the states with large debt can trace that debt not only to the recession itself but to policies made during more prosperous times.

Michigan, a state that has a federal unemployment insurance debt close to $4 billion, provides a striking example. During the last recession in 2002, state lawmakers raised weekly benefits by about 20 percent. Policies like this led the state to unemployment insurance insolvency in 2006, three years before the surge of borrowing among other states began. Because of this, Michigan has already felt the federal penalties that most states are now fearing.

There are, however, about a dozen states that have not had to borrow to cover unemployment benefits. How have they managed this?

Despite all the debt and questions of recovery, Rick McHugh of the National Employment Law Project says it’s important to pay attention to the dozen states in good shape. Some are in excellent shape. Washington State hasn’t had to borrow from the federal unemployment fund since the 1980s and — if things continue looking the way they are — it won’t have to anytime soon. Over the past decade, the state’s Legislature and business community agreed to a set of taxes that kept the unemployment trust fund well funded throughout the current recession.

The basic idea behind the Washington State strategy is to pump the trust fund with enough money during the good times so it will be ready for the bad. The Legislature and business community “wanted to create a system that’s stable and adequate,” says Sheryl Hutchinson, a spokeswoman for Washington’s Employment Security Department. “Stability to them is predicting what the future cost will be.”

The bottom line is that, if congress keeps extending the benefits period, state governments will have to keep borrowing and even the healthy states may be forced to borrow. I don’t have an answer for this but it needs to be addressed soon.

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2 Responses to “The problem with extending unemployment”

  1. […] It will also add to state deficits as they are responsible for unemployment benefits as well (more here and […]

  2. […] sounded like a great idea but it is proving to be a fiscal disaster for many state governments (previous post). Using fiscal chicanery and accounting practices that would put the average person in jail, […]

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