States face unemployment cash crisis
Rising unemployment drains state trust funds, forcing them to borrow from Washington to continue paying claims.
NEW YORK (CNNMoney.com) -- State unemployment insurance trust funds are rapidly running out of money amid soaring job losses.
This is prompting state officials to consider raising employer taxes or curtailing benefits, while forcing them to borrow from the federal government to cover claims.
"Some states didn't have adequate reserves built up," said Andrew Stettner, deputy director of the National Employment Law Project. "They are having significant problems paying out the increased number of benefits."
The number of people collecting state unemployment benefits hit a 25-year high of 3.84 million, on a seasonally adjusted basis, the Labor Department said Thursday. The following day, the department announced that 240,000 jobs were lost in October, pushing the unemployment rate up to 6.5%, up from 6.1%. It's the highest rate since March 1994. Nearly 1.2 million jobs have been lost this year.
With companies unveiling mass layoffs almost daily, states are likely to see further strains on their trust funds. This comes at a time when the weakening economy is already putting great stress on governments and employers alike.
The trust funds are financed through unemployment insurance taxes levied on businesses. States must pay out the claims promised under the law, even if they have to borrow the funds from the feds.
The trust funds of five states are insolvent - meaning they have reserves of three months or less - while another eight state funds are nearly insolvent with reserves of four to six months, according to the National Employment Law Project. Six other states don't have enough money to cover a year of payments.
Michigan, hit hard by the collapse of the auto industry, has essentially nothing left in its trust fund, said Norman Isotalo, spokesman for state's Department of Labor & Economic Growth. New initial claims are up 21% over a year ago, while the unemployment rate hit 8.7% in September, up from 7.3% a year earlier.
Though it has borrowed money from the feds to cover claims since 2006, Michigan has avoided paying interest on the loan by repaying it quickly. The state, however, no longer has the funds to repay the loan, which currently totals nearly $473 million. The debt will starting accruing interest in January, and the state will pass along the additional fees to employers.
Businesses already shell out between .06% and 10.3% on the first $9,000 of earnings of each worker, depending on how many of their former employees are drawing benefits. About 20% of companies soon will start paying up to $67.50 in an additional solvency tax, levied on employers who have paid less in unemployment taxes than their former employees have received in benefits.
The state realizes the additional tax will impose yet another burden on struggling companies, but the law does not allow exceptions, said Stephen Geskey, director of Michigan's Unemployment Insurance Agency.
"It is not an optimal time for the solvency tax to kick in," Geskey said. "But there's really no wiggle room."
The Michigan fund is being squeezed, in part, because of changes lawmakers made over the past 12 years, Geskey said. When times were good -- the fund had a $3 billion balance in 2001 -- officials lowered the tax rate. This resulted in a loss of $1.1 billion in contributions, he said.
Spurred by the looming interest payments, legislators are only now planning to address the matter. Discussions should begin soon, said Democratic state Sen. Michael Switalski.
"Now it has our attention," Switalski said. "We're going to have to deal with it."
In Ohio, claims are running 40% above last year's levels. The state's trust fund is running an uncomfortably low balance of $305.6 million. Its own calculations show it needs $2.3 billion to withstand a moderate recession, said Sara Hall Phillips, labor policy analyst with the state's Department of Job and Family Services.
Ohio lawmakers failed to act on recommendations by a state advisory council to replenish the fund. The council had proposed raising taxes paid by employers and freezing workers' benefits for three years, Hall Phillips said.
Employers in Ohio pay between 0.5% and 9.2% on the first $9,000 of earnings of each worker. The maximum weekly benefit is $365 for a worker with no dependents.
Even though the fund will likely run out of money by early January, lawmakers likely won't address the issue before the middle of next year.
The rising number of claims is not the only reason the fund is running out of money, Hall Phillips said. The law calls for benefits to increase annually, though there's no provision for taxes to do the same.
When Ohio faced a similar fiscal crunch in the 1980s, forcing it to borrow from the feds from 1980 through 1988, it had to temporarily freeze benefits and raise taxes.
"Claimants will still receive unemployment compensation benefits and that will continue no matter what happens with the trust fund or with the legislature," she said. But "benefits may be locked at that level for a few years."
The implosion of Wall Street and the weakened economy around the state has led to a surge of unemployment claims in New York. The state now pays benefits to 148,000 people, up from 113,000 a year ago, said Leo Rosales, spokesman for the state Department of Labor.
As a result, New York's trust fund has dwindled to $357 million, down from $538 million a year ago. To meet its obligations, the state has been borrowing from the feds for years, receiving nearly $1.1 billion over the past three years alone. In 2006, the state had to pay $7 million in interest of $1.5 billion it borrowed in 2005.
The state legislature tried unsuccessfully in the spring to increase unemployment insurance taxes, while also raising the maximum weekly benefit, which now stands at $410, to $550. The bill would have increased the wage base to $11,500 over time, from its current $8,500.
Tuesday's election left Democrats in control of both chambers of the state legislature, and the bill now has a better chance of getting passed, said Assembly member Susan John, a Democrat, chair of the labor committee.
"Members are back home in their districts and are recognizing how much people are struggling," John said. 
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