State Unemployment Insurance -- Not a Bakken Story

The concept is simple. During good economic times build up the state unemployment trust fund so that when the cycle turns, there will be money available for unemployment.

Businesses pay money into state unemployment trusts; the amount businesses pay into the trust is based on a formula that includes the company's history of layoffs.

Due to several reasons, state unemployment trusts are depleting very, very quickly. The reasons include:

• In some cases, states cut back on unemployment taxes for political reasons, not practical reasons
• This recession has been deeper and longer than usual
• The recession has resulted in a larger number of unemployed than usual
• The trusts' investments tanked along with the general downturn of the market
• States increased benefits during good times -- but they continue even in bad times

This is not the first time this happened. In the past it has led to insolvencies in the unemployment funds:

• 1990s: seven states needed to borrow money from the federal government to meet obligations
• 2001: eight states needed to borrow money due to the recession

What has been the history of the trust funds?

• 2000: total reserves for the 50 states and territories came to $54 billion
• 2007: $38 billion
• 2009: $11 billion -- lowest in the program's history when adjusted for inflation

So, how are things going in 2011?

• Georgia has already started borrowing money due to political decisions in the past, including a four-year tax holiday for employers (1999 - 2003) when businesses were doing well, and the trust fund was bulging
• New Jersey: the fund has dropped from $3 billion to $35 million. NJ expanded benefits, cut taxes when things were good; NJ even diverted unemployment trust funds to pay hospitals for indigent care
• California: kept payroll taxes the same, but gradually doubled the maximum weekly benefit. California has now borrowed $10 billion to meet obligations; California owes the federal government $360 million in interest payments by the end of September -- that's just the interest -- there's still that pesky $10 billion principal
• Michigan: first state to start borrowing from the federal government, when they started borrowing back in 2006 (that's five years ago); Michigan had also cut payroll taxes and increased benefits
• Texas: one of the best run unemployment trust funds, but Texas also had to borrow $1.3 billion in 2009

And the beat goes on.