While unemployment insurance benefits have assisted millions of families through the recession and have even helped improve the economy, state unemployment insurance programs are facing their worst financial position since they were founded in 1935, according to a recent brief by the National Academy of Social Insurance.
"The current financing crisis in state UI programs can be described as a perfect storm resulting from the constellation of four factors," says Wayne Vroman, author of the brief and economist at the Urban Institute. "These factors are: a deep and prolonged recession, low reserves prior to the recession, the timing of the downtown, and low levels of employment through 2011."
The brief reveals that of the 53 unemployment programs, which are offered in the 50 states as well as the District of Columbia, Puerto Rico and the Virgin Islands, 36 have received loans from the U.S. Treasury since 2007. Twenty-eight of those have outstanding Treasury loans for a total of $37 billion.
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States set unemployment insurance tax rates that employers pay on a tax base. Those payments are required to cover at minimum the first $7,000 of workers' wages. Although 16 states have a tax base that automatically increases each year for average wages, 35 states do not, and they are more likely to borrow from the federal government. In fact, 29 of the 35 have done that since 2007, resulting in the increased likelihood of revenue shortfalls during times of high and prolonged unemployment.
Granted, some states are trusting fund deficits in a multiple ways, such as higher taxes, reduced benefits and restricted eligibility, most states with unsettled loans are waiting for new federal policy actions. Of the three major legislative proposals that have been introduced, two offer options to raise the federal tax base from $7,000 to $15,000.
"It is clear that higher tax bases are associated with improved long run-solvency," Vroman says. "But is that sufficient to address the long-run financing problem in the states? Given the large scale of the financing problem and the reluctance of many states to take aggressive actions to improve solvency, it may be time to consider broader reforms."
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