States Borrow Heavily to Meet Huge Demand for Unemployment Benefits
Business + Economy

States Borrow Heavily to Meet Huge Demand for Unemployment Benefits

Experts say that most states will have to increase taxes on employers in order to repay $35 billion in federal loans

Faced with the toughest and most prolonged recession since the Depression, state governments have had to borrow $35 billion during the last two years to keep their unemployment insurance programs afloat. Job losses exact a dramatic toll on workers as well as state coffers. But the fallout doesn’t end there.

Experts say that most states will have no choice but to increase taxes on employers in order to repay their federal loans, as they have in the past. As the cost of doing business increases, hiring new workers decreases. And hard-hit industries such as construction and manufacturing typically pay even higher unemployment insurance taxes because they lay off workers more frequently.

Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, said the economic drag comes at a time when states also need to kick-start their economies with investments in education, infrastructure and welfare programs. "It's an unholy alliance of some pretty serious expenditures," he said.

Every state has had to borrow from the federal unemployment trust fund to keep their programs going, in amounts ranging from California's $7.9 billion and Michigan's $3.6 billion to Vermont's $9 million and New Hampshire’s $7 million, according to Department of Labor data.  Moreover, they are steadily going deeper into the hole.

Dolores Esser, head of the Virginia Employment Commission, told a state legislative committee early this year  that the state's debt may peak at $1.15 billion. Employer taxes will have to more than double, she said, to cover the continuing higher cost of benefits and restore Virginia’s fund to solvency.

The average tax per employee, which was just under $100 a year in 2008 and 2009, will be about $162 this year and reach $237 in 2012, Esser said. But that would not be the only added burden on the state.

She said total interest payments from 2011 to 2013 would amount to about $29.8 million, and that the money could not come from the tax-supported trust fund or the federal grants that pay administrative expenses. In other words, Virginia, which like most states is already trying to close a large budget gap, would have to come up with the funds elsewhere.

States are responsible for regular unemployment benefits, which in most states run for 26 weeks — 30 weeks in a few — and for half the cost of extended benefits triggered when joblessness is high. The federal government, which also levies a small unemployment insurance tax on employers, normally pays the other half — though currently it is paying the full cost of extended benefits.

According to Labor Department figures,  14.5 million people received $119 billion in state and federal unemployment insurance benefits in fiscal 2009. This year 16.3 million beneficiaries are expected to get $157 billion.

That includes the Emergency Unemployment Compensation program enacted in 2008 to deal with soaring long-term unemployment. It offered up to 53 additional weeks of benefits paid for entirely by the federal government. The EUC program was set to expire this spring, but the Senate voted this week to extend it through the end of the year, paying benefits to about 5 million workers whose other benefits have expired, at a cost of about $38 billion.

On top of that, any beneficiary who has been getting a check has had an extra $25 added to it — another recession related payment that might be extended.

Most Senate Republicans have opposed extension of the expiring jobless benefits. Last week, Sen. John Kyl, R-Ariz., complained that "continuing to pay people unemployment compensation is a disincentive for them to seek new work. I am sure most of them would like work and probably have tried to seek it, but you can't argue it is a job enhancer."

There is a large body of economic research that backs up Kyl’s basic point. For instance, a 2002 National Bureau of Economic Research paper by Alan B. Krueger, a Princeton University professor who is now assistant secretary for economic policy at the U.S. Treasury, and Bruce D. Meyer, then at Northwestern University, concluded: "The empirical work on unemployment insurance and workers' compensation insurance finds that the programs tend to increase the length of time employees spend out of work."

But that's only a small part of the story. The many billions of dollars worth of benefits have helped keep families going financially at a time that jobs are scarce, and the spending of those benefits have helped stimulate the economy, according to administration and Congressional Budget Office economists.

CBO Director Douglas Elmendorf, testifying before Congress' Joint Economic Committee on Feb. 23, said, "Extending additional unemployment benefits would directly help those who would otherwise exhaust their unemployment benefits between March and December of this year. Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost-effective in spurring economic activity and employment."

In fact, Elmendorf said extending benefits would be more cost effective in terms of creating jobs than any other option CBO studied.