April 2020 – Erik Sherman for Business Insider
Over the last five weeks, more than 26 million Americans have filed for unemployment. That’s in addition to the 7.1 million already out of work, according to the Bureau of Labor Statistics.
The result is a real unemployment rate of 20.6%, the highest since the Great Depression.
Many who have lost their jobs are relying on unemployment insurance to cover expenses. But states are struggling to keep up with demand.
“We have an unprecedented number of people applying for unemployment all at once,” Dominic Wells, a political science professor at Clayton State University in Georgia, told Business Insider. “This has created a shock to the unemployment system and it’s understandable that states would not be prepared for such a sudden spike in unemployment claims.”
Many states unemployment funds were running low before the current crisis. To fund unemployment insurance, each state levies a payroll tax on businesses, putting the proceeds into a federal trust fund operated by the Department of Labor.
The agency considers a state fund solvent if it has enough money to cover a year’s worth of payouts, based on the average of the three highest years of unemployment in the past two decades.
A Department of Labor report from February indicated that 21 states already didn’t meet the minimum threshold to pay benefits for a full year.
California (with $3.26 billion in its fund, enough for 2.5 months), New York ($2.65 billion, or 4.3 months), and Texas ($1.93 billion, 4.3 months) were among those at the bottom of the list.
Given the size of the working population, the potential number of unemployed residents, and the amount of an average weekly payout, those states — and many others — will run out of money in a matter of weeks, Jared Walczak, director of state tax policy at the Tax Foundation, told Business Insider.
“California, New York, and Ohio could exhaust their funds before the end of April,” Walczak said, “followed shortly by Texas, Massachusetts, Illinois, Minnesota, and a few other states that would likely exhaust these funds early in May.”
Even states considered solvent by the Department of Labor won’t have enough funds if unemployment rates continue to rise, Walczak said.
Alabama’s fund has $704 million, but its smaller population and lower benefit rate mean that, under normal circumstances, it should have a year of funding.
But circumstances are hardly normal.
Critics say some states are reopening precipitously, at least in part, to keep their unemployment funds from drying up.
George Chidi is an Atlanta journalist who has written about wealth inequality and Georgia politics for the Guardian, the Atlanta Journal-Constitution, and Decaturish.
“Georgia had a really healthy unemployment fund before this, compared to some other states,” Chidi told Business Insider. “But because of provisions in the state constitution, they can’t borrow money and they can’t raise taxes.”
That fiscal pressure is why Georgia Governor Brian Kemp relaxed the state’s lockdown order this week, Chidi said. “It’s about making sure people can’t file unemployment,” he posted on Facebook. “It isn’t about saving lives, certainly. It’s not about the peak of the curve.”
A representative for Georgia Gov. Kemp said Chidi’s claims were “factually inaccurate.”
What happens if the well runs dry? When their unemployment coffers run low, individual states can borrow from the Federal Unemployment Account, fed by a national insurance tax on businesses.
The Great Recession saw unemployment levels soar and states borrowed so much that it took many of them years to pay back. North Carolina, for example, borrowed $2.8 billion in 2009 to pay out unemployment claims. It didn’t finish repayment until 2015.
Former North Carolina budget director Lee Roberts told Business Insider that the state came up with the money by adding a 20% surcharge to its unemployment tax and by cutting the duration and dollar amount for payouts.
The peak national unemployment rate after the 2008 economic crash was 10%, half of what it is now. The current crisis could empty the Federal Unemployment Account, as well, Roberts said.
“No system is designed for [this] level of unemployment,” he said, adding that states could look to trim the length and amount of benefits again.
“I think that’s highly likely to happen,” Roberts said. “If you’re a state policymaker, not only do you save money by cutting the amount and duration of benefits, you’re getting a lot of input from the business community pushing you in that direction.”
The speed and magnitude of the unemployment crisis, combined with the relatively low levels of savings in many trusts, has created an unprecedented situation where both state funds and the Federal Unemployment Account could run into the red.
“[It] certainly could happen,” Robert said. “I think the answer will be determined by where we are in relation to the crisis and the shutdown orders in particular.”
“The funds are going to run out very quickly,” Michele Evermore, a policy analyst at the National Employment Law Project, told Business Insider. “It’s pretty terrifying. This isn’t going to be over anytime soon.”
The $2 trillion CARES Act passed at the end of March allotted $250 billion for extended unemployment benefits, giving jobless Americans an extra $600 a week for four months. But those funds are distinct from unemployment insurance and assume states will continue to pay from their trusts.
New York, which used up half of its trust from February to mid-April, has filed for a $4 billion federal loan. California, which saw its trust-fund balance dropped nearly 40%, is expected to do the same, the Wall Street Journal reported, as are Connecticut, Massachusetts and several other states.
“If you were to pool all of the state unemployment trust funds together to pay [all] benefits, there would be enough to pay off 10 weeks,” Walczak said. “The federal trust fund [adds] another 12 weeks.”
The FUA currently has approximately $78.6 billion in it. A Department of Labor representative could not confirm what would happen if the Federal Unemployment Account had insufficient funds to meet states’ needs.
Evermore said she assumed Congress could replenish the federal backstop by approving another massive appropriations bill.
The Senate passed a $484 billion relief package on Tuesday, but it was targeted at small business loans, aid to hospitals, and additional virus testing. Getting another relief bill through in the immediate future is far from certain.
“We’ve gone so far on the national debt here that, the next time we address this issue, the Senate should be back in session fully up and running with everybody involved in the discussion,” Senate Majority Leader Mitch McConnell said Tuesday.
That isn’t scheduled to happen until May 4 at the earliest.
If an emergency appropriations bill isn’t passed in time, the states “would have to either increase taxes, borrow from future spending, or they might have to borrow from other spending programs,” Jason Reed, a finance professor at the University of Notre Dame’s Mendoza College of Business, told Business Insider.
“Or they could issue municipal bonds to pay for this,” he added, which don’t require Congressional approval.
Whatever remedy they choose, Reed said, “the repercussions would be felt by the states for years to come.”