States Struggle to Pay Unemployment Trust Fund Debt

The more than $26 billion in lingering debt has gained little notice, but forced states to scale back unemployment benefits, raise taxes, tap general funds and even turn to the private bond market.
by , | October 8, 2012

By Jake Grovum

More than $26 billion in lingering debt and billions in mounting interest have forced a number of states to scale back unemployment benefits, raise taxes, tap general funds and even turn to the private bond market as they look to shore up unemployment insurance trust funds that plunged into the red during the Great Recession.

And now, years removed from the depth of the crisis, there’s concern that some of funds are being refilled so slowly -- if at all -- that certain states could be in an even worse position when the next downturn comes, compounding a problem that’s plagued them for years.

On Sept. 30, 18 states and the Virgin Islands paid about $2 billion in interest to the federal government to cover debts remaining from tens of billions in loans taken during the worst of the Great Recession to cover shortfalls in trust funds.

The payment, and the debts themselves, have gained little notice outside a certain circle of analysts, state officials and federal actuaries. But the fact is that states still have $26 billion in debts, and some say the longer the red ink remains, the harder it will be for them to climb back into solvency.

“The states have a fundamental problem: They’re not funding these trust funds appropriately,” Mike Evangelist, of the National Employment Law Project, says. “You just keep digging the hole deeper, you keep losing more. It is a compounding problem.”

Designed to cover unemployment benefits in states, the trust funds ebb and flow with the economy. The funds comprise taxes on both employers and wages, and ideally would remain flush during a strong economy and be drawn down when unemployment spikes.

But that didn’t happen before the Great Recession, or downturns before it. As the National Employment Law Project has found, 31 states cut unemployment insurance taxes by at least a fifth from 1995 to 2005. Making matters worse, the average contribution to funds hit historical lows from 2000 to 2009.

All told, states borrowed nearly $50 billion from Washington during the recession to cover jobless benefits. That figure’s been halved in the years that followed, but many still have significant debt, and many are still borrowing. And as the economy continues to grow slowly, with the threat of another dip into recession always present, some are sounding the alarm that this is just the latest example in a long trend of mismanagement.

Still, some states weathered the Great Recession’s toll on their funds with stimulus-backed, interest-free federal loans. But those ended in 2010, and a year later states still owed nearly $40 billion. And today, many big states still have substantial debts. California, for example, has nearly $10 billion, while New York has $3.1 billion. North Carolina stands at nearly $2.5 billion, while Ohio and Indiana are carrying more than $1.7 billion each.

Historically low interest rates have kept costs manageable. But as Stateline has reported, many states have automatic business tax hikes that go into effect if states fail to pay back their debts.

Others have slashed benefits: Florida linked benefits to the state’s unemployment rate in an effort to cut costs, reduce benefits and replenish its fund. That’s meant some of the most restrictive unemployment benefits in the country, but it’s also helped to reduce its debt by more than $1 billion since August 2011.

“They’re imposing sacrifices on claimants because of the debts,” Wayne Vroman of the Urban Institute, who has studied unemployment trust funds, says of states’ actions. “States are being quite slow in paying things off, and in some cases they’re putting off their payments.”

An increasing number of states have also turned to a relatively novel -- and controversial --approach to cover their debts: the private bond market. So far, six states have issued bonds for their debt, totaling nearly $10 billion, on top of the $26 billion owed to the federal government.

More are expected to take that approach. The hope is that they’ll get better terms from private investors, and so far, credit rating agencies have viewed the bonds favorably. But some say the private market simply offers a false sense of fiscal security.

“Bonding is not the panacea that most departments of Labor are selling it as,” the NELP’s Evangelist says. “They pretend like they bond and these debts go away.”

The Urban Institute’s Vroman agrees, calling the number of states turning to the private market “unprecedented.”

“Basically they’ve swapped one form of debt for another,” he says. “The problem is what the states are doing to their own funds.”

And that remains the problem. Just as insufficient reserves cost states ahead of the Great Recession, some are now in an even weaker position should another downturn take hold.

“The fact is that there’s going to be another recession in the near future, and we’ll be right back where we were,” Evangelist says. “You just keep moving backward.”

The news hasn’t been uniformly dire, particularly for those states that have reduced their debts. New Hampshire, for example, was facing a nearly insolvent fund during the recession and instituted an emergency surcharge to close the gap, a measure that was repealed this week. Others managed to avoid borrowing entirely.

But it seems for every recovering state, there’s one still drowning in debt. As the recession has focused attention on unemployment insurance, calls for the federal government to step in are growing. But there’s no consensus on what Washington should do to help the states. And even if there were, some say, there’s even less political will to do it.

“The big question is what part does the federal government play in this? Clearly left to their own devices, the states are not capable of financing this responsibly,” Evangelist says. “But no one really talks about this. It’s hard to get people interested in financing unemployment insurance.”

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