On Tuesday, California became the first state to borrow federal funds to cover unemployment payouts
With over 30 million Americans still grappling with the hard truth that they are now unemployed, many states are facing a similar cash crunch: a shortage of unemployment funds.
The problem started gaining attention in mid-April, but as California became the first state to borrow from the federal government to cover its unemployment insurance payments on Tuesday, the dire nature of most states’ unemployment reserves is now on full display.
In addition to the $348 million already borrowed by the state (a total of $10 billion has been approved through the end of July), Connecticut and Illinois have also received approval for federal loans of $1.1 and $12.6 billion, respectively, although neither state has yet to access the program. New York asked the federal government for a $4 billion no-interest loan to cover its unemployment burden on April 22.
States paid out a whopping $75.3 billion in unemployment compensation benefits in 2009. COVID-19, because of the colossal number of job losses it has created, is expected to trigger a recession far worse.
“The good news is that states are substantially more prepared today than they were at the onset of the Great Recession,” wrote Jared Walczak of the The Tax Foundation. “The bad news is that some estimates of unemployment during the coronavirus pandemic have it far outstripping job losses during the Great Recession, and even if the worst estimates prove overly pessimistic, no one can doubt that state UI funds face a financial reckoning.”
Walczak goes on to explain that 21 states were found by the Department of Labor to potentially have a shortage of funds on hand to tough out a recession. Six of the states with the lowest solvency levels are some of the country’s most populous: California, New York, Texas, Illinois, Massachusetts and Ohio.
“To put these numbers in context,” Walczak writes, “consider this: if unemployment claims simply matched the average of the three highest benefit costs over the past two decades (which would mean fewer claims than in the Great Recession), California’s trust fund would run out in about 10 weeks.”
Sure enough, here we are.
The fallout of all this borrowing from the feds shouldn’t be too painful. States like California, with lower solvency levels, forfeit their right to interest-free loans. If they fail to repay the loans in a timely manner, in-state employers will be forced to pay higher federal unemployment insurance taxes to compensate.
If employers disrupted by COVID-19 are still trying to get back on their feet when these loans are finally repaid, the extra expense has the potential to derail their recoveries.
“In order to repay these loans, at some point, we'd have to raise taxes,” Texas A&M professor Dr. Raymond Robinson told ABC affiliate KVUE about the UI problems his state is facing. “If you raise taxes on businesses, they might reduce employment or they might reduce wages.”
