State Unemployment Funds Going Broke From Flood of Claims

(Bloomberg) -- The record number of Americans drawing unemployment benefits over the past six weeks is rapidly draining the cash set aside by the biggest U.S. states, leaving them poised to borrow tens of billions of dollars from the federal government.

The strain is likely to grow with more than 30 million workers, or nearly one fifth of the labor force, relying on unemployment checks with vast segments of the economy shut down. The unprecedented scale of the payouts are depleting the state governments' unemployment trust funds, nearly half of which had less set aside than needed to contend with a recession.

In the first two weeks of April alone, New York drew $1 billion from its account, or more than 40% of the total, according to U.S. Treasury Department data. California's balance has dropped by more than $2 billion since March 16, according to state officials. Texas, which had about $1.3 billion left to pay benefits in mid-April, has submitted a loan request to the U.S. Labor Department. Illinois was approved to borrow nearly $13 billion, while Connecticut and Massachusetts also applied for loans.

Those six states were among 21 that entered the economic crisis with unemployment trust funds below the minimum recommended solvency level to weather a recession, according to a U.S. Department of Labor report. California, Texas, New York, Illinois, Ohio and Pennsylvania had less than half the minimum. Hawaii, whose trust was 30% above minimum solvency, was also approved for a loan, according to the Treasury Department.

“Borrowing is going to start to happen at a rapid pace,” said Wayne Vroman, a labor economist at the Urban Institute, a Washington-based think tank.

The loans will put even more strain on state governments that are veering toward their biggest fiscal crisis in decades, with the Center on Budget and Policy Priorities estimating that they could face deficits of $650 billion through mid-2022. States with insufficient unemployment reserves will likely need to raise taxes on businesses or reduce benefit levels to repay the debt, which would exert an additional drag on the economy.

“When states go into this with healthier balances in their unemployment trust funds, they are not going to have to raise employer taxes the way states with weak unemployment trust funds are,” said Patricia McGuigan, a public finance analyst with Kroll Bond Rating Agency.

Borrowing from the federal unemployment trust isn't unusual during recessions. Thirty-five states and the Virgin Islands borrowed $154 billion from the fund since 2008, when the Great Recession led to a long period of unemployment.

While Senate Majority Leader Mitch McConnell and President Donald Trump have vowed not to bail out fiscally imprudent states, they can't block federal unemployment loans to replenish the state trust funds. States can't be denied loans if their unemployment program conforms with federal law.

“Unemployment benefit payments will occur without interruption or delay,” said James Bernsen, a spokesman for the Texas Workforce Commission, which has requested to borrow $1.8 billion in May, $2.6 billion in June and $2 billion in July.

States and territories set the parameters of their unemployment programs within federal guidelines, including payroll tax rates and benefit amounts. State unemployment insurance taxes are paid by employers and remitted to the federal trust fund, where each state has a separate account for covering normal unemployment insurance benefits.

When the accounts run dry, states have to submit a letter to the U.S. Labor Secretary requesting an advance. They have as long as 34 months to repay the loans before the federal government recoups the money by raising taxes on employers.

As part of the $2.2 trillion stimulus bill enacted last month, the federal government is waiving interest payments on state unemployment loans through December. During the Great Recession, the government granted two years of interest-free loans, a step the Urban Institute's Vroman said should be done again.

“That would relieve a lot of anxieties,” he said.

New York has requested $4 billion loan, a state spokeswoman said earlier this month. Massachusetts asked for a $900 million advance for May, according to a letter from Governor Charlie Baker to Labor Secretary Eugene Scalia.

California, Illinois and Connecticut also requested advances, but haven't drawn any money, according to a Treasury Department website. Illinois was approved to borrow $12.6 billion through July 31st, while California was approved to borrow $10 billion, and Connecticut $1.1 billion, according to Brad Benson, a public affairs specialist at Treasury's Bureau of Fiscal Service.