15. Unemployment Insurance Trust Fund Solvency
2011 was the third consecutive year with substantially heightened unemployment rates. Some states, like Nevada, fared significantly worse than the national average, hitting rates as high as 14 percent or more.
Such sustained high jobless numbers have drained state unemployment insurance trust funds—the accounts used to pay out unemployment benefits. States with a negative balance have had little choice but to borrow from the federal government just to stay afloat.
In September 2011, 27 states were borrowing money from the federal government, with outstanding loans totaling more than $37.4 billion. Also in September, states started paying substantial interest on their balances, something that was stalled until 2011 by a provision in the American Recovery and Reinvestment Act.
Employers in states that borrowed money may be subject to an automatic federal tax increase, which means 2012 could bring a bigger tax bill in many states. In 2011, employers in Indiana, Michigan and South Carolina already were paying higher tax rates because of outstanding state loan balances. To address solvency issues, 35 states increased taxes on employers in the 2010 fiscal year and seven states enacted legislation to raise the taxable wage base, according to a survey by the National Association of State Workforce Agencies.
While President Obama proposed extended temporary relief for states from interest payments and potential tax increases in both his 2012 fiscal year budget and his deficit reduction plan, neither is likely to get much traction in Washington given the current fiscal and political climate.
“In the new era of austerity the (deficit reduction) bill has little chance of passing. While the measure includes important provisions for states, its limited prospects for passage, combined with the president’s controversial plans for paying for it, have ensured that it has received a lukewarm reception in state capitols,” said Chris Whatley, CSG’s Washington Office Director.
In those states with relatively healthy unemployment accounts, state leaders are taking proactive steps to make sure they stay that way. The West Virginia legislature passed an emergency measure this year that would have amended the state code to authorize a loan from the Revenue Shortfall Reserve Fund (Rainy Day Fund) to the Unemployment Compensation Fund. The move was designed to ensure the fund always has at least $20 million to pay unemployment claims.
But the question of how to reach solvency can be controversial in itself.
In New Mexico, for instance, differing opinions on how to shore up the state’s fund led to a court battle. Earlier in the year, the legislature approved a $128 million tax increase designed to keep the state’s unemployment benefits flowing. Gov. Susana Martinez vetoed the tax hike and introduced an alternative plan, which prompted a group of Democrats to file a lawsuit to invalidate the veto. When the legislature did not resolve the dispute during its special session, the case headed to the state Supreme Court.
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