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States Scramble to Repay Feds for Unemployment Insurance Loans—Plus Interest

Starting in 2011, states that have borrowed from the federal government to pay out unemployment benefits may find themselves deeper in debt when the feds begin collecting interest.

Thanks to the stimulus bill, the 31 states that have borrowed more than $41 billion from the feds to pay unemployment insurance to jobless workers have not had to pay interest on those loans so far, as we’ve reported. That will change, however, when the provision that waived interest payments expires in the new year.

States with outstanding loans will have to begin paying interest on their loans in 2011 or else give back federal grant money used to administer state unemployment insurance programs, according to McClatchy Newspapers:

The federal government estimates the collective interest on the outstanding loans will total about $2 billion in 2011, while continued state borrowing is expected to stretch the outstanding loan amount to $65 billion by fiscal year 2013.

In addition, employers in about 25 states could face additional federal tax penalties of $21 to $84 per employee if state loans aren't paid by November 2011. Unemployment insurance programs are run by the states, but financed by federal and state taxes on wages.

As we've noted, some states have had to borrow from the federal government because they've chronically underfunded their own insurance trust funds. States with little left in their own unemployment insurance trust fund reserves have a few options at their disposal to pay back these loans with the additional interest.

They could try to cover the payments with general revenue funds, which could be difficult given many states’ fiscal woes. As we’ve noted, states could raise taxes on employers or cut benefits to pay back their loans, and many already have.

Bloomberg reported last month that Texas borrowed more than a billion dollars from investors by issuing municipal bonds in order repay its unemployment debts and to save on impending interest payments. This may not be a realistic option for all states, however, as investors increasingly scrutinize the financial health of bond issuers, particularly those state governments already deepest in debt.

A number of business and trade associations, including the U.S. Chamber of Commerce, have urged Congress to extend the waiver on states’ interest payments.

For more on how deep in the red states’ insurance trust funds are, check out our Unemployment Insurance Tracker.

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