Many States Now Cutting Jobless Safety Net After Failing to Responsibly Finance Rainy-Day Funds
New York - Thirty states, including Pennsylvania, will have to pay back nearly $1 billion by the end of September for federal funds borrowed to cover unemployment insurance, but a new analysis from the National Employment Law Project finds that much of the financial pain facing these states could have been avoided with more responsible financing of their rainy-day funds leading up to the Great Recession. With jobless fund debt that peaked at $50 billion in 2011, many states are now slashing the safety net designed to help unemployed workers - even though the main source of the debt, the NELP report shows, was unsound and unnecessary employer tax breaks during better economic times, leaving states unprepared for the recession.
"A decade of tax giveaways when the economy was far more robust left most states' unemployment trust funds depleted of reserves and woefully unprepared for even a modest downturn," said Christine Owens, executive director of the National Employment Law Project. "Business lobbyists and their legislative allies engage in a cynical sleight of hand in trying to pin the blame for the unemployment funding shortfall and borrowing on unemployed workers, when the real cause is irresponsible financing policies leading up to the most severe downturn since the Great Depression."
Between 1995 and 2005, 31 states reduced employer contribution rates by at least one-fifth, causing employer unemployment tax rates to fall to a historic low over the decade leading up to the recession. At the beginning of the recession, the combined balance in state trust funds was half the amount experts recommend. Trust fund balances were so low in two states - Michigan and New York - that they began borrowing before the recession was even fully underway.
The response of state lawmakers has largely been to shift the burden onto unemployed workers, according to the report. At least 10 states have recently passed legislation designed to cut benefit payments and severely restrict eligibility, jeopardizing the capacity of the unemployment programs to insure families against unexpected job loss and stabilize the economy during downturns. As a result, thousands of jobless Americans are finding their unemployment assistance being reduced or simply unavailable.
"Ignoring the advice of experts and past experience, state lawmakers cut employer unemployment insurance taxes when they should have been growing their trust funds. The state business groups that lament today's employer tax increases are the same ones that lobbied hard for the earlier tax breaks that got us into this mess in the first place. States can't afford to pay basic unemployment benefits because of previous lobbying efforts to cut taxes," said Owens.
Each state is responsible for financing unemployment payments out of its own trust fund. State trust funds are designed to accumulate reserves when the economy is doing well so that states can afford to pay benefits during a recession. Unemployment financing experts recommend that states prepare for downturns by accumulating enough reserves to pay benefits for up to one year during a recession.
When the recession hit, the report finds, an unprecedented number of states (36) needed federal loans to pay basic state unemployment benefits after state trust fund reserves ran dry. Total borrowing peaked at nearly $50 billion in 2011, and thus far, states have paid an additional $3 billion in interest and repayment penalties. As a direct consequence of the business tax breaks, only 19 states entered the recession with the recommended amount of trust fund reserves. Of these 19, only 6 required a loan during the downturn, but 30 of the 34 states that did not meet the solvency standard had to borrow. (The 53 unemployment insurance jurisdictions - i.e., the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands - are counted as states in this report.)
In other words, states that entered the recent recession with one year of recession-level reserves had a 32 percent chance of borrowing, whereas states that failed to meet this benchmark had an 88 percent of borrowing.
Examining trust fund finances through the end of 2010, the report found that had all states met the recommended solvency standard at the beginning of the recession, the number of borrowing states would have fallen from 31 to 13, and the amount borrowed from $42 billion to $9 billion. Those states that maintained a positive reserve balance could have avoided untimely employer tax increases associated with interest payments and repayment penalties. Meanwhile, states still requiring a loan would have faced much lowerborrowing costs.
Trust fund reserves are beginning to recover, but collectively states are still running a negative balance. States must accumulate an estimated $86 billion of aggregate reserves by 2017 to meet recommended reserve levels. Paying off today's loans and building up trust funds for the next recession will require substantial discipline on the part of state lawmakers to employ responsible financing practices.
"Unemployment insurance financing is an important issue that does not garner the attention it deserves and needs," said Owens. "The unemployment insurance program has provided major ballast for the economy during the sustained downturn and has been a major bulwark against poverty for millions of unemployed workers andtheir families. State and federal policymakers who care about strengthening the economy and unemployed workers and their families must start taking the financing issue seriously. Until a majority of states choose to finance this program responsibly, unemployment insurance will remain at risk for America's workers. We can't afford to lose such a vital program, now or in the future."
The National Employment Law Project is a non-partisan, not-for-profit organization that conducts research, education and advocacy on issues affecting low-wage and unemployed workers. For more about NELP, visit www.nelp.org.