States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing
Many states have had to borrow billions from the federal government to maintain unemployment insurance payments. But the interest-free grace period on those loans that came with the stimulus bill is about to run out.
Sometimes it's time to pay the piper. And sometimes that piper is the federal government. And sometimes the piper wants more than $1 billion. Soon.
Because of the high jobless rate and past fiscal irresponsibility, 30 states have collectively had to borrow more than $40 billion from the federal government just to keep unemployment insurance checks in the mail. A provision in the stimulus bill made those loans interest-free for an extended grace period.
But no more. Efforts to include an extension of the grace period in Obama's tax cut extension enacted at the end of last year failed, and the first batch of 14 states will have to start paying interest before the end of this year. Given that state budgets need to be hammered out in advance, that means state legislatures will soon face tough choices as they come back in session.
The amounts due range from California and Michigan, which each face payments of more than $300 million dollars, to Kansas, which will owe about $6 million. (Fun fact: That's $2 for every Kansan.) And because of federal rules, states can't use unemployment insurance taxes to make interest payments, which means cash-strapped states will have to take that money from their general budgets, so there will be less money for roads, schools and other priorities.
Because of a historical compromise, each state operates its own unemployment insurance fund with wide latitude to set tax rates and benefits. While some states were careful to save up and build a cushion of reserves in good years, others got themselves into this mess by maintaining dangerously low levels of reserves for years before the Great Recession hit. (How is your state doing? Check out our Unemployment Insurance Tracker.)
The bill is coming due at a particularly bad time for state legislatures, which already face an $82 billion shortfall for 2012, said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures.
That budget crunch is the largest and deepest fiscal crisis states have faced since the end of the great depression, Perez said.
To make matters worse, most states with trust funds in the red are still bleeding--borrowing more from the federal government to pay out benefits even as they are hit with interest payments.
California is borrowing millions of dollars a day, said Loree Levy, a spokesperson for California's workforce agency. Other states have passed unemployment insurance tax increases, straining employers at the worst possible time, but they were not enough to get their funds back in the black.
Overall, state legislators are at something of a loss to deal with the problem, Perez said.
Some creative solutions are on the table. Texas, which still has reasonably good credit, plans to sell bonds. California, which at this point would probably not be approved for a Sears card, will borrow money from a creditor that can't say no: Gov. Jerry Brown's plan would dip into the state's disability pension fund.