Many States Running Low on Unemployment Benefits

By Ed Frauenheim

Feb. 2, 2009

Just as laid-off Americans are applying for unemployment benefits in droves, the state coffers for cutting those checks are running low.

A December study by the National Association of State Workforce Agencies found that some 30 states could be at risk of having their unemployment trust funds run dry over the next several months. Already some states have taken out loans, according to NASWA, whose members manage state unemployment and other workforce programs.

The financial squeeze amounts to a flaw in the jobless benefits system, which critics also fault for stingy benefits and outdated eligibility rules. There’s widespread agreement that unemployment insurance funding is broken. But how to fix it is subject to debate, with some arguing for higher taxes and others calling for Washington to give states more of the revenue it collects under the Federal Unemployment Tax Act.

The effective federal unemployment tax rate generally has been 0.8 percent of the first $7,000 paid in wages to each employee annually—for a maximum federal tax of $56 per employee per year.

Those taxes go to a federal unemployment trust fund, which pays for state administrative expenses, helps cover the cost of extended unemployment benefits and provides loans to states that run out of money to pay benefits.

Because states are legally obligated to pay unemployment benefits, an empty state account means state officials have to turn to Washington or outside sources for funds. But private-sector loans entail interest payments. And loans from the federal government also can result in interest charges.

A number of observers suggest the funding problem stems from too-low taxes at the state level. Unemployment insurance tax rules and rates vary widely by state. Some states have lowered their employer tax rate—even to zero—during good times, says Randy Eberts, president of the W.E. Upjohn Institute for Employment Research. “Therefore, they have not built up their reserves in times like these when high joblessness puts a huge strain on the system,” Eberts says.

But Larry Temple, executive director of the Texas Workforce Commission, rejects higher taxes as the answer to state funding troubles. Temple, whose agency oversees unemployment insurance in Texas, says the funding dilemma stems from the federal government hording Federal Unemployment Tax Act funds rather than distributing more of those dollars to states. Texas, he says, gets about 32 cents on the dollar returned to it for workforce programs including unemployment insurance.

The National Association of State Workforce Agencies has called for every state to receive at least 50 percent of the federal unemployment taxes paid by its employers. And in October, the group proposed that $6 billion be distributed from the federal unemployment trust fund to state unemployment insurance programs.

As of December 31, the federal unemployment trust fund had more than $31 billion.

“They sit on a huge balance up there,” Temple says.

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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