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Monday, Dec. 15, 2008

Jobless benefits drain states

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. Unemployment taxes are collected by states from employers, but the rate varies from state to state. In good times states build up trust funds, so that when unemployment is high there is enough money to cover the requests for benefits, which are guaranteed by the federal government.

"You don't expect the loans to happen this early in a jobs slump," said Andrew Stettner, 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.

Indiana's unemployment trust fund became insolvent last month and has borrowed twice from Washington since then — the first such loans to the state since 1983. It also expects to request an additional $330 million early next year.

Michigan, which has been borrowing money from the federal government for the past few years to replenish its fund, is now $508.8 million in the hole and unable to repay it. Next month the state, where the unemployment rate is more than 9 percent, will begin levying a special "solvency tax" against some employers to replenish its trust fund.

California, New York, Ohio, Rhode Island and other states are inching toward insolvency as well, and may have to borrow from the federal government to get through at least the first quarter of 2009.

In South Carolina, officials recently requested a $15 million line of credit.

"Right now we have $40 million in our trust fund, and we are paying out around $11 million a week," said Allen Larson, deputy executive director for the unemployment insurance program at the South Carolina Employment Security Commission. "So we think it is going to be very close as to whether or not we can get through this year. We have never experienced anything like this."

Officials in New York said the state was not in dire straits but very well may need to borrow in the first quarter of next year.

The situation puts states, many of whom are facing huge deficits, in an even tighter vise. As more people lose their jobs, the revenue base from which benefits are drawn shrinks. Adding to that burden is that states will eventually have to pay back the money they borrow to keep benefits flowing.

Some states are particularly worried about next year because the lion's share of unemployment taxes are collected early in the year, and they are not sure the money will stretch through the end of the next year.

The maximum amount of income that the federal government can tax employers for each worker for these benefits is $7,000. (The amount ranges from about $7,000 to about $25,000 for state taxes.)

"It is something that we are concerned about," said Kim Brannock, a spokeswoman for the Kentucky Office of Employment and Training, where the unemployment trust fund balance is $133 million, compared with $250 million a year ago. The fund has not borrowed money from the federal government since the 1980s. "At this point, we are solvent but we are monitoring the situation," Brannock said.

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.

"With longer-term solvency issues due to the sharp increase in unemployment, federal borrowing quickly becomes expensive," said Loree Levy, a spokeswoman for the Employment Development Department in California, which is already facing a multibillion dollar budget gap. "We are anticipating interest payments of $20 million in 2009-10, and if nothing is done to revise the revenue generation model, the interest would be $150 million in 2010-11."

As such, states are then forced to raise taxes or cut services, or both.

In many cases, states that have kept unemployment tax rates artificially low, or in some cases decreased them, find themselves in the most dire situation. Indiana legislators, for example, reduced the tax rates for businesses by 25 percent in 2001.

"Frankly, they created the perfect storm," said John Ruckelshaus, the deputy commissioner for the Indiana Department of Workforce Development. "The Legislature will have to go in and look at the whole unemployment trust fund first thing when they begin their session."