Unemployment insurance trust funds in Nevada and Virginia have gone belly up.

Nevada and Virginia join 22 other states that, so far, have borrowed a total of more than $20 billion from the federal government to keep unemployment checks in the mail.

States have until 2011 before they have to start paying interest on their unemployment trust fund loans, but most will struggle to pay them back without raising taxes on employers or decreasing benefits to workers – just as their economies are trying to emerge from recession.

The result of a historical compromise, the U.S. has a patchwork unemployment insurance system where the 50 states, the District of Columbia, the Virgin Islands and Puerto Rico all maintain separate unemployment insurance trust funds, and as we covered in our series with public radio’s Marketplace, each is given wide latitude to set benefits and determine how well -- or poorly -- financed its fund will be.

 

(How is your state’s unemployment insurance trust fund doing? Check out our interactive map.)

In Virginia, where the state anticipates borrowing $252 million before the end of the year, the culprit was probably low taxes: the state has the nation’s second-lowest tax rate on employers.

To replenish its trust fund, Virginia is raising taxes on employers – and slashing benefits for beneficiaries who also receive Social Security.

Nevada's case is more complicated. Because of fairly sound financing policies, the state went into 2009 with a year’s worth of reserves in its trust fund. While this is less than the year and a half of reserves experts recommend, it is significantly higher than the national average. (On average states started 2009 with just around six months' worth of reserves.)

Nevada’s trust fund was likely sunk by the state’s staggering 13.5 percent unemployment rate combined with the high percentage of unemployed workers collecting benefits.

Nevada must now decide how it will pay back the estimated $1 billion it’s on pace to borrow this year. The state’s unemployment insurance board will meet early next month to consider the tough alternatives of raising taxes on employers or cutting benefits for workers in need.