Why State Unemployment Trust Fund Debt Matters

  • April 29, 2014
  • By Jake Grovum (2)

Hotel workers stand in line at the Local 54 UNITE HERE union office to sign up for unemployment benefits in Atlantic City, N.J. (AP/The Press of Atlantic City)

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State unemployment insurance trust funds, the engines that finance jobless benefits for millions of Americans, were battered by the Great Recession and went deep into debt to meet the demand from the unemployed.

Years after the worst of the crisis, many states are still saddled with huge debt, according to a Stateline analysis of U.S. Treasury data showing trust fund balances from 2007 through the first quarter of 2014.

At its worst in early 2011, states' collective debt owed to the federal government reached more than $47 billion. Through the first part of 2014, 16 states still owe more than $21 billion to Washington. Many other states borrowed billions from the harder-to-track private bond market to cover funds that were insufficient to pay benefits.

Altogether, three dozen states turned to Washington for loans during the Great Recession, more than had relied on similar support during the recessions of the 1970s and 1980s. California reached the highest level of debt among the states, more than $10 billion, and its fund was nearly $9.8 billion in the red as of March 31. Indiana, New York, North Carolina and Ohio all still have more than $1 billion in debt.

Others saw their trust fund balances plummet over the course of the recession and then recover along with the economy. Minnesota started with a positive trust fund balance of $237.8 million, which slipped to more than $700 million in the red early in 2011. As of March this year, the state's positive balance was more than $1 billion. Another example is Virginia, which started 2007 with nearly $670 million in its trust fund, saw its balance fall more than $400 million into debt in early 2011, but has since recovered to nearly $139 million in the black.

Other states proved resilient enough to weather the downturn. Mississippi's fund had nearly $720 million in reserves in early 2007 and saw it drop to $294 million in early 2011. As of March, it was back to more than $500 million.

States are allowed to borrow from the federal unemployment account held by the U.S. Treasury, but are charged interest over time (although the stimulus bill waived those payments through 2010). Each year, the interest rate equals the rate earned on the loans in the final quarter of the previous year (for 2014, the rate is 2.38 percent.)  If a state fails to make enough progress paying back its loan, the federal unemployment tax rate on employers will increase automatically to help pay the debt. For the most recent tax year, 13 states were subject to such a hike.

To see how each state's trust fund fared during the Great Recession, and the collective balance of all 50 states and the District of Columbia, see Stateline's data visualization.

Struggling with Debt

During good economic times, states aim to maintain large enough balances in the trust funds to pay benefits to jobless workers if unemployment spikes. If money is short, especially during deep recessions, states sometimes are forced to borrow in order to pay the benefits, or else they must slash benefits or otherwise cut costs.

During the Great Recession and its aftermath, many states were forced to borrow and cut benefits. Some with high levels of debt have made permanent changes to reduce the number of weeks of unemployment benefits available, to levels not seen since the 1935 Social Security Act established the program.

“The poor trust fund position of a number of states is the driving force that's causing the restriction of benefits that's going on,” said Wayne Vroman, a senior fellow at the Urban Institute. “The fact of the crisis as reflected in the trust fund debts is reflected in the benefits.”

High levels of debt can also affect businesses, which contribute payroll taxes to the federal government and the states to help pay for the unemployment insurance system. Those taxes pay for jobless benefits, which states administer.

Many states have higher tax rates that kick in if their trust fund falls dangerously low. Others levy higher taxes on businesses that lay off more workers. In response to recent debt, some raised taxes to close the gap. In Colorado, the state in 2010 levied a surcharge on employers who laid off more workers to shore up the state fund, which was once saddled with more than $500 million in debt. Colorado later took out a bond to repay its loan, lowering taxes for businesses in the process. As of March, it had a positive balance of $481 million, not including debt owed on the private market.

The result is a patchwork of unemployment insurance systems nationwide – and also the solvency of the underlying funds that pay for benefits. The differences were stark during the Great Recession.

Washington state, for example, is often held out as an exemplar. The state had $3.1 billion in its unemployment insurance trust fund in late 2008 just before the Great Recession took hold. Even throughout the downturn, the fund never fell below $2.1 billion, said Neil Gorrell, the employment system policy and unemployment insurance director at the state's Employment Security Department.

Instead of levying a payroll tax only on $7,000 of wages paid per person — the minimum required under federal law — the state taxes wages up to $41,300, Gorrell said, the highest of any state. California, by contrast, taxes only the minimum, the only state besides Arizona to do so. Washington also taxes employers more if they lay off more workers, because they create more of a burden on the unemployment system.

The result was a remarkably stable fund during the course of the recession; the state's tax rates and benefits haven't been subject to the wild shifts suffered by workers and businesses elsewhere.

“It's not volatile--that's important to us,” Gorrell said. “The closer to insolvency a state is, the more volatile their tax rates will have to be.” 

Another Alternative

Other states haven't fared nearly as well. But instead of raising taxes, the answer in some has been to reduce benefits, particularly where tax-averse Republicans dominate the legislature, or where the business lobby, which tracks the unemployment trust fund issue closely, has particular power.

North Carolina drew national headlines and fierce protests last year with a sweeping overhaul of its unemployment system. The measure made the state the first to opt out of the federally funded long-term unemployment benefits system, but also reduced the number of weeks available through its standard system to 20 weeks when the unemployment rate tops 9 percent. If the rate falls to 5.5 percent or lower, just 12 weeks are available.

Beyond those changes, the measure was also criticized for not revisiting financing changes from the 1990s that reduced the amount businesses pay to the fund. Early in 2007, North Carolina's trust fund balance was $117 million, compared to an average nationally of $595 million. In early 2012, it was nearly $2.6 billion in debt. As of March 2014, it was $1.45 billion in the red.

Still, supporters say the move was necessary given the state's crushing debt. When Republican Gov. Pat McCrory signed the bill into law, he cited the debt as a driving force behind the changes. And since 2013, the state has seen its debt fall by nearly $1 billion.

“We had an unbalanced system that was paying out more than it was taking in,” said Jake Cashion, director of governmental affairs for the North Carolina Chamber of Commerce, which was instrumental in dealing with the state's debt. “We feel like today we have a program that's built for the future, one that's being fixed.”

Another way for states to deal with debt has been to turn to the private bond market. Those debts are notoriously hard to track, and they aren't reflected in the federal fund balance data, meaning that some states could show improvement by paying off federal loans with another loan taken out elsewhere. By some accounts, a half dozen states borrowed at least $10 billion during the Great Recession on the private market.

One was Michigan, which had a negative trust fund balance of $384 million at the beginning of 2007, and saw it fall to nearly $3.9 billion in debt in early 2011. In response, the state cut the number of weeks of benefits available to jobless workers to 20 weeks and raised taxes on businesses.

But it also turned to the private bond market for a loan, which it now expects to pay back by 2019, saving more than $1 billion compared to the federal interest and payback schedule. The state says its trust fund has a positive balance of $2 billion today — accounting for the influx of bond-sale dollars. (Treasury data show the state has a positive balance of $1.3 billion, which doesn't include the funds the state received as part of the bond sale.)

Unprepared For Next Round

For those who follow the trust fund issue closely, the states as a whole are a long way from the level of funding they need to rebound from the Great Recession, let alone prepare for the next spate of joblessness.

That's in part because of their poor position even before the recent downturn: Headed into the Great Recession, states collectively had less than $40 billion in their unemployment trust funds, the lowest level since World War II (adjusted for inflation). Heading into the recession in the early 2000s, states had more than $50 billion in their funds.

Lawmakers both in the states and in Washington see a replay of the familiar bust-driven cycle of debt over the past seven years. The perilous state of unemployment trust funds has been studied by many think tanks and government watch dogs over the years. And nearly every state has borrowed to cover costs at some point in the last half-century.

“The system that we have now is one where a bunch of states go bankrupt in a recession and the federal government bails them out,” said Washington state's Gorrell.

Others worry the changes that are being made — more heavily weighted toward benefit cuts than the tax hikes or financing changes that could shore up both trust funds and the jobless benefits system for the long term — could eventually hollow out the program in some states.

“It will make it difference for people to not have a sustained source of income if they're unemployed,” said the Urban Institute's Vroman. “It's like getting a haircut: A whole lot of small snips, but the net effect is the system is a smaller system going into the next recession.”

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