The unprecedented surge in jobless claims amid the coronavirus pandemic is not only overwhelming states’ unemployment agencies, it’s also draining their unemployment insurance trust funds.
Six states – including California, New York, Texas and Ohio – can only fund up to 10 weeks of benefits before they’ll have to turn to the federal government or other sources for infusions, according to a recent estimate from the Tax Foundation. Another 15 state trust funds don’t meet the federal Department of Labor’s recommended minimum solvency standard, which requiresbeing able to pay benefits for a year in an economic downturn similar to the Great Recession.
The cash crunch won’t affect the millions of Americans currently applying for or receiving benefits – they’ll get their weekly checks regardless of their state’s financial situation. About 16.8 million people, roughly 11% of the labor force, filed initial unemployment claims over three weeks ending April 4 – dramatically higher than during the Great Recession. Economists expect job losses to continue.
And states aren’t on the hook for the historic expansion of the unemployment benefits program recently passed by Congress. The federal government is footing the bill for the temporary $600 boost in weekly payments and short-term expansion of benefits to those affected by the coronavirus and the self-employed – which is projected to cost about $250 billion.
But states do remain responsible for their share of unemployment insurance, which typically lasts up to 26 weeks. If their trust funds run out, they could take loans from the federal government – but some states could wind up paying interest and employers could face heftier taxes to cover the debt. Other choices: Issue bonds or draw down other state funds, which most can ill-afford to do as the coronavirus wreaks havoc on tax revenues.
“Most states have relatively few options,” said Jared Walczak, director of state tax policy at the Tax Foundation. “States will have to borrow extensively. Ultimately, this will likely lead to higher taxes both at the federal and state level on businesses, which states want to avoid as long as possible.”
How long the money will last
Texas may need to turn to the federal government by the middle of May to pay unemployment benefits, though its current estimates indicate it may not have to until the end of May or possibly into June, the state Workforce Commission said. More than 748,000 initial claims were filed in the Lone Star State in the three weeks ending April 4, compared to 700,000 claims filed last year.
Ohio, meanwhile, forecasts its trust fund could last as long as eight weeks, if employers pay their quarterly taxes in a timely manner, the state Department of Job and Family Services said.
Nearly 700,000 initial jobless claims were filed in Ohio over the three weeks ending April 4, compared to about 364,600 claims filed during all of 2019. The state has distributed more than $124 million in unemployment payments to more than 195,000 people during the past three weeks, the agency said.
New York and California’s state agencies did not return requests for comment.
States needed a federal bailout during the Great Recession
Many states have been shortchanging their unemployment insurance trust funds for years, in part because they’ve been reluctant to raise taxes on businesses.
The Great Recession walloped the trust funds, though the job losses were far less severe and were spread out over more time. Still, an unprecedented 35 states and the Virgin Islands had to borrow money from the federal government to pay claims.
The loans totaled a record $42 billion by the end of 2010. Texas borrowed $1.8 billion, while Ohio borrowed more than $3.3 billion during the Great Recession.
Employers in most of these states ended up paying higher taxes to coverthe debt.
The impact lingers for some. Ten states cut back the duration of their unemployment programs to as little as 12 weeks to reduce future obligations. (At least three of those states returned to 26 weeks during the pandemic.)
And not all states have sufficiently replenished their trust funds even more than a decade later, said Christopher O’Leary, senior economist at the W.E. Upjohn Institute for Employment Research.
“In aggregate, the system is weaker than it was before,” he said. “Because these crises only happen occasionally – every eight years, every 10, 12 years – people don’t pay as much attention to unemployment insurance as they should.”
