30 States Borrowed More than $44 Billion from the Feds to Pay Unemployment Benefits

States Cutting Unemployment Benefits, Hoping for More Federal Help

May 22, 2011

AP – Some of the states that have drained their unemployment insurance funds are cutting the number of weeks that a laid-off worker can count on those benefits. Legislators are trying to limit tax increases for businesses to replenish the pool and are hoping the federal government keeps stepping in when the economy slumps.

Michigan, Missouri and Arkansas recently reduced the maximum number of weeks that the jobless can get state unemployment benefits. Florida is on the verge of doing so. Unemployment in those states ranges from 7.8 percent in Arkansas to 11.1 percent in Florida.

The benefit cuts come as legislatures deal with the damage that the recession inflicted on state unemployment insurance programs. The sharp increase in the number of people who lost their jobs drained the reservoir of money dedicated to paying out benefits.

About 30 states borrowed more than $44 billion from the federal government to continue payments to laid-off workers. Many states hastened the insolvency of their funds by keeping balances at historically low levels going into the downturn.

The burden of replenishing the funds and paying off the loans will fall primarily on businesses through higher taxes, but the benefit cuts are an effort to limit the tax increases.

States usually provide up to 26 weeks of benefits to laid-off workers. Michigan and Missouri have cut that to a maximum 20 weeks. Arkansas went to 25.

Florida is considering a more complex change that would link the duration of benefits to the strength of the economy. The cap would range from 23 weeks during periods of double-digit unemployment to as low as 12 weeks during periods of extremely low unemployment. The Florida Legislature approved the changes, but the governor hasn't signed the bill.

Once state benefits are exhausted, laid-off workers often are eligible for 13 weeks to 20 weeks of extended benefits. States and the federal government usually split the cost for that program. During recessions, Congress typically takes the aid a step further, providing several more months of emergency benefits entirely paid for by the federal government.

The actions taken by legislatures apply specifically to state benefits, but also will reduce future federal benefits because the changes affect the formula used to calculate them.

Allen McClendon, 40, of Kansas City, Mo., said he lost his job as a mechanic in August 2010 and has been getting unemployment benefits in Missouri since February. He said the payments allow him to buy food, make payments on his pickup truck and pay for gas and auto insurance. He is worried about what will happen if his state and federal benefits run out before he lands a job.

Before that happens, he hopes to get training from a Missouri employment center that would allow him to get a commercial driver's license or to repair heating and cooling units.

"If they run out before I've completed my schooling and have got a job, then I'm really in trouble," he said. "I'd so much rather be working than dealing with this," he said.

Benefits vary from state to state, but average about $300 a week, or about one-third of a recipient's previous wages.

In good economic times, most of the unemployed find a new job before their benefits expire. But in times of high unemployment, states have come to count on extra help from the federal government. Some say that reliance is playing a role in the bills to cap benefits.

"A lot of states are basically saying, `Hey, why are we paying for these benefits when, in a recession, the federal government will step in?'" said Steve Woodbury, an economics professor at Michigan State University.

Sen. Debbie Stabenow, D-Mich., said relying on the federal government to keep up the cash flow is risky. She said last year's fight to extend unemployment benefits was difficult, with Democrats barely able to generate the votes necessary to pass a bill.

"I think it would be an error in judgment to assume that the Republican House would extend unemployment benefits," she said.

Sen. Orrin Hatch, R-Utah, said Congress in the future might worry that repeated extensions of unemployment benefits would serve as a deterrent to finding a job.

"There's some truth to that" concern, said Hatch, the top Republican on the Senate Finance Committee, which has jurisdiction over the program.

Employers pay both state and federal taxes for unemployment insurance. States collect the taxes that pay for basic benefits. The federal taxes help pay for administering the program and providing the federal government's share of extended benefits. State tax collections will have increased about 44 percent since 2009, according to the Department of Labor.

Still, as a percentage of wages paid, unemployment insurance taxes are at historically low levels, less than 1 percent. When the unemployment insurance program began in 1938, the tax rate for unemployment insurance averaged about 2.7 percent of wages.

Nevertheless, higher taxes in tough economic times are challenging businesses. States apply their highest tax rates to those industries with the most worker turnover. Those often are the same industries that are hardest hit by recession, such as manufacturers.

In Florida, the minimum tax that is applied to businesses with low employee turnover went up from about $25 per employee to about $72 this year. The maximum tax for businesses with high turnover remained at $378 per employee. Companies could use that tax money to keep their doors open or to expand and hire more workers, said Teye Reeves, a policy director for the Florida Chamber of Commerce.

"For our economy to thrive again, we need businesses to be strong," Reeves said. "They want to have more employees. They want to open new stores. ... They've got to have the capital to be able to provide those jobs."

But Rick McHugh, of the National Employment Law Project, argued that legislatures should not shore up their unemployment insurance programs by making workers share the pain.

"It's not a shared-sacrifice situation because, certainly in most states, employer organizations lobbied to keep the programs from being properly funded in advance of the recession," McHugh said. "Now, they're saying the program is broke so we have to cut benefits"

McHugh said he's worried that more states will seek to limit benefits when legislatures return to work next spring. Most have adjourned for the year.

"It's really a threat to the vitality of the safety nets because each state feels pressure to go to that lowest common denominator," McHugh said.