33 states out of money to fund jobless benefits

NEW YORK (CNNMoney.com) -- With unemployment still at a severe high, a majority of states have drained their jobless benefit funds, forcing them to borrow billions from the federal government to help out-of-work Americans.

A total of 33 states and the Virgin Islands have depleted their funds and borrowed more than $38.7 billion to provide a safety net, according to a report released Thursday by the National Employment Law Project. Four others are at the brink of insolvency.

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Debt-challenged California has borrowed the most, totaling more than $8.4 billion, followed by Michigan and New York, which have loans worth more than $3 billion. Nine other states have borrowed at least $1 billion from the federal government.

"The nation's financing system for jobless benefits is under unprecedented stress," said Andrew Stettner, deputy director of the New York-based advocacy group for the unemployed. "While the recession has certainly made things worse, this funding crisis has been developing for years."

At the onset of the recession, only 19 states met the recommended funding level, which is one year of reserves equal to the highest amount of unemployment insurance paid out during prior recessions.

Financing experts suggest that states build up their jobless benefit coffers during strong economic times so that they can draw from them during downturns.

Federal and state governments collect money for unemployment benefits by taxing employers on a small portion of their employee wages. While total wages and weekly jobless benefit levels have been rising, governments haven't increased the taxable base wages at the same pace.

Instead, they adopted a "pay as you go" approach, keeping taxes and fund levels low during good times and raising taxes and cutting benefits when strapped for cash. That left many states with insufficient jobless funds to weather the recession.

Of the 13 states that will likely be able to fund jobless benefits without borrowing from the feds, 10 of them followed the recommended financing tactic. That readied them for the recession, the National Employment Law Project concluded in its study.

"The current crisis should compel policy makers to forge a new path to forward financing of the unemployment insurance program," Stettner said. "As the broke funds of 33 states makes clear, unemployment insurance reserves need to be stocked up before recessions hit so that states are prepared."