Unemployment surge pushing state funds toward insolvency

A surge in unemployment caused by the coronavirus shutdown has started to take a financial toll on state jobless funds

JEFFERSON CITY, Mo. — A surge in unemployment stemming from the coronavirus shutdown of large parts of the U.S. economy is starting to push some state jobless funds toward insolvency.

At least a half-dozen states already have notified the federal government that they could need to borrow billions of dollars to pay unemployment benefits because their own trust funds are running out of money.

While the shortfalls won’t prevent unemployed workers from getting government aid, the federal loans could lead to higher taxes for businesses in future years to repay the debt.

U.S. Treasury data shows California, Connecticut and Illinois all expect to borrow soon from the federal government to prop up their unemployment funds. Officials in Massachusetts, New York and Texas confirmed to The Associated Press that they also have notified the federal government of their anticipated need for loans.

All six of those states’ unemployment funds ranked among those at the greatest risk of insolvency because they didn’t have adequate reserves to weather a recession, according to a U.S. Department of Labor report released before the coronavirus outbreak. Many more states also could need federal loans given the widespread economic damage.

“I can’t imagine a state that’s not going to have to borrow by the end of this year,” said Michele Evermore, a senior policy analyst at the National Employment Law Project, a New York-based group that advocates for low-wage workers and the unemployed.

As of mid-April, about 26 million Americans had filed unemployment claims in the first five weeks since governments began ordering people to stay home and some businesses to close as a precaution against spreading the virus that causes the COVID-19 disease. It’s already the worst stretch of job losses in U.S. history. New unemployment data to be released Thursday is expected to push that total even higher.

State unemployment benefits are funded by special taxes on employers and paid through state trust funds. Each state sets its own tax rate and benefit payment amounts. When trust funds run low, states can get federal loans that must be repaid with interest. Loans taken out this year would need to be repaid by November 2022, or else the federal government could raise taxes on businesses to recoup the money.

A law signed by President Donald Trump last month waived the interest on state unemployment loans through the end of this year. But that’s a shorter reprieve than was granted during the Great Recession, when interest was waived from February 2009 through December 2010.

The last recession led to the insolvency of unemployment trust funds in 35 states that collectively racked up more than $40 billion of debt to keep paying unemployed workers. It took years for states to repay that.

“Unfortunately, many of them got caught in this vicious cycle now, where they spent most of the 11 years of economic growth looking backwards, paying off the prior accrued debt rather than being able to save and invest for this current crisis,” said Jared Walczak, director of state tax policy at the Tax Foundation, a Washington, D.C.-based nonprofit.

From the beginning of March through mid-April, state unemployment trust funds have declined by a median of 10%, according to an AP analysis of U.S. Treasury data. But the drop has been far more dramatic in states that were among the first to shut down their economies and among the quickest to pay benefits to the unemployed.

Massachusetts, which provides among the most generous unemployment benefits nationally, saw its trust fund cut in half from early March to mid-April, from $1.6 billion to less than $750 million. That marked the largest percentage decline nationally.

In a letter to the U.S. labor secretary, Gov. Charlie Baker estimated the state could need to borrow $1.2 billion in May and June to pay unemployment benefits.

New York’s unemployment trust fund also declined by nearly half during that six-week period, from almost $2.5 billion to less than $1.3 billion. The state has applied for up to $4 billion in federal loans, said New York Department of Labor spokeswoman Deanna Cohen.

How much help New York ultimately needs will depend on how many more people seek unemployment benefits and how long they are without work, Gov. Andrew Cuomo said.

“But it’s in the billions of dollars,” he said. “There’s no doubt about that.”

At the start of this year, California’s trust fund had barely one-fifth of the recommended amount needed to weather a recession, the worst rating among all states. It’s trust fund balance fell from $3.1 billion in early March to $1.9 billion in mid-April and has continued to slide.

The state could need to start borrowing from the federal government by the beginning of May, said Barry White, a spokesman for the California Employment Development Department.

Officials in Connecticut and Texas also said they could need to start borrowing in May to pay unemployment claims.

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Associated Press writer Marina Villeneuve in Albany, New York, contributed to this report.