As Unemployment Soars, Some States on Brink of Insolvency

As a rising number of Americans sign up for unemployment benefits, many of the state-funded trusts that pay them are on the decline.

At least 12 of them are on the brink of insolvency. In 20 other states, the funds have lost value, even before the big job losses of the past two months.

While unemployed workers will get their benefits – federal law requires it – the trust fund woes are putting states into a peculiar squeeze. They're loath to raise taxes or cut services in a recession, so many are racking up new loans. That debt burden will affect residents for years to come.

"No one wants to raise taxes in the middle of this kind of recession. And nobody wants to cut benefits," says Maurice Emsellem, an Oakland-based policy analyst who focuses on unemployment insurance issues for the National Employment Law Project. "So the states are going to have to borrow ... and that's going to have a cost." The costs are already being rung up in some of America's biggest states. California's trust fell 42 percent in the year ended September, the latest period for which numbers are available, leaving it with enough to pay four months of estimated benefits. New York's trust had enough for two months of benefits; Indiana's, just one month. Michigan's is already bust. It has borrowed $550 million from the federal government to fill the hole.

The demand for benefits, meanwhile, is likely to soar.

Stamping his feet against the chill, Colin Hollinghead is waiting in line outside a New Jersey employment-assistance office in East Orange, one of the state's poorest towns. The 40-year-old father was laid off last month from a local auto-parts distributor. After a fruitless hour on hold this past Friday, he says he decided to come down to see if he could file for unemployment insurance in person.

"Money is real, real tight and it's the worst time of year,'' he says. "There's supposed to be an office to help you find a job in there, so I'll check with them ... but I'm not expecting anything."

The good news for Mr. Hollinghead is that the federal government extended unemployment benefits for seven more weeks in an emergency bill rushed through Congress at the end of last month. That follows an earlier extension of 13 weeks passed in June that now brings the total run of the benefit to 10 months and protects more than 1 million Americans whose checks would have otherwise stopped coming this holiday season.

The widening budget shortfalls have some states weighing tax increases, despite the recession. Michigan, one of the hardest hit states with unemployment above 9 percent, is already pushing up payroll taxes.

State budget problems are likely to worsen before they improve. Of the states that completed a survey from the National Conference of State Legislatures (NCSL) last month, 38 said they were expecting to be in the red for the year ending in September 2009 – a total budget gap of $32 billion. Worse, 26 states forecast more red ink – a cumulative $65 billion – for the following year.

"As bad as the current state fiscal situation is, it may pale in comparison to what looms ahead," the NCSL said. "As a rule, state finances lag the national economy… this means that the toughest years lie ahead."

One Likely Option: Cutting State Services

With the easiest options already tapped, states may have to cut services.

"Food stamps I'm not worried about – it's entirely federally funded," says Rebecca Blank, a senior fellow and economist at the Brookings Institution in Washington. "But I do worry about the healthcare programs and education. Medicaid is such a large part of the budget that it's easier to cut services."