States’ safety nets for jobless are frayed
An expected “tsunami” of unemployment claims across the USA threatens to overwhelm already strained resources.
As skyrocketing numbers of Americans lose their jobs, many states are at risk of burning through their own unemployment savings and relying on a federal bailout to give laid-off and quarantined workers their benefits.
Lawmakers have known for years this could happen, even as states resisted increasing taxes on businesses and ignored warnings that an emergency would overwhelm their unemployment programs.
Just last month, the U.S. Department of Labor warned that six of the largest states — California, Illinois, Massachusetts, New York, Ohio and Texas — would not be able to handle a surge in unemployment claims on their own.
The surge began two weeks ago, when the weekly increase in new employment claims topped the increase in any week during the Great Recession, which stretched from December 2007 through June 2009. Last week, several state unemployment websites crashed as demand overwhelmed their capacity.
“I think what we’re looking at is the front end of a tsunami,” Wayne Vroman, a labor economist with the Urban Institute,
said of the economic impact of the coronavirus. “Some drastic changes will be needed to be able to service people.”
The United States and its territories had a cumulative $75.7 billion in their unemployment trust funds at the end of 2019. They had to borrow twice that much to pay unemployment benefits stemming from the last recession.
Ohio, for example, had $1.3 billion in its unemployment trust fund at the end of 2019, the latest data available. That’s more than the $444.5 million it
had on the eve of the Great Recession. But it still had to borrow nearly $3.4 billion to pay benefits.
The current crisis bears signs of being worse.
Funding problems
State and federal governments share responsibility for unemployment programs. The Great Depression-era, New Deal programs require companies to pay taxes into individual funds. States use the funds to pay unemployed workers.
Federal unemployment taxes on businesses supply a portion of the funds, and those tax rates have steadily dropped since 2006, based on the most recent data. State unemployment taxes make up the rest. Those, too, have fallen in recent years as lawmakers seek to ease the corporate financial burden.
Before the Great Recession, almost every state provided unemployment checks for 26 weeks, said Michele Evermore, a senior researcher and policy analyst with the National Employment Law Project. Ten states have reduced the benefit period. Today, Florida limits benefits to 12 weeks.
The coronavirus rescue package that President Donald Trump signed into law Wednesday will allow all states to get zero-interest loans to supplement their unemployment funds through Dec. 31.
Normally, interest-free loans are reserved for states with a high solvency rating. But only 29 states had such ratings, according to the latest U.S. Department of Labor report issued in February.
Another 15 states were in fair condition, according to the report, but did not meet the standards for a zero-interest loan. California, Illinois, Massachusetts, New York, Ohio, and Texas were in the worst shape.
The Labor Department pays attention to whether states are funding their unemployment reserves, but it doesn’t force them to save to any particular level. Evermore said the primary penalty for insufficient funding is a higher interest rate: “The penalty is on the back end, not the front end.”
The latest relief package has erased that penalty through the rest of the year.
In Ohio, the speaker of the state House of Representatives, Larry Householder, downplayed the state’s trust fund balance in February, predicting the federal government would come through in a crisis.
“If there isn’t enough money in the fund to pay claims, the state can borrow from the feds at a rate of less than 1%,” Householder, a Republican, told The Columbus Dispatch. “Does it make sense to take money out of the economy and place it in storage with the Ohio government or to borrow at an almost negligible rate if claims exceed the fund reserves?”
As a result of the Great Recession, 35 states borrowed a total $154 billion to cover claims, and collectively paid nearly $4 billion in interest.
Zero-interest loans from the federal government don’t usually last forever. States put themselves in a precarious position when they borrow large sums.
“It’s a huge problem because if states borrow and don’t pay it back right away, they don’t get low interest loans anymore and every employer in the state pays higher (federal unemployment) taxes,” Evermore said.
In California, reports going back at least to 2003 have warned about the state’s rocky unemployment fund. The Labor Department’s 2019 and 2020 reports identified the state’s fund as the least solvent in the nation, except for the Virgin Islands. That territory still has debt to the feds.
“It’s predictable,” said Gary Burtless, an economist with the Brookings Institution. “They don’t build up enough reserves, because employers in the state fight payroll taxes.”
He added that voices defending the interest of workers were considerably stronger a few decades ago.
More demand
The burdens on the state funds are skyrocketing. Businesses are closing as they seek to comply with government orders limiting the gathering of people. The result is mass layoffs.
So far, it’s not clear how much money each state will need, but the unemployment claims are cascading into state unemployment offices. Burtless says the states could run through reserves soon if the crisis lasts long.
Nationwide, 281,000 people filed unemployment claims two weeks ago, up from 211,000 the week before, an increase of 70,000. That’s a larger single-week increase than at any point during the Great Recession, when the weekly increase never passed 60,000.
Last week, states reported more than 10-fold increases in the number of daily claims over 2019 numbers. The demand for filing claims crashed systems in Kentucky, Oregon and New York, which is now designating a day for each laid-off worker to file based on the first letter of their last name.
Ohio saw nearly 140,000 new unemployment claims between March 15 and Thursday, compared with under 5,000 in the same period the previous week. Illinois received more than 41,000 claims in the first two days of the week, compared with 4,445 claims in the same two days a year ago. Massachusetts said it received 19,884 claims on March 16 alone.
In Texas, unemployment claims increased 39% from March 8 to 14 compared to the comparable week last year.
New York has not released exact claim numbers, but the state received more than 21,000 calls by noon Tuesday, compared with 2,000 the previous Tuesday. The unemployment website saw 110,000 visits on Tuesday, up from 42,000 a week earlier.
California Gov. Gavin Newsom said Thursday that his state received about 40,000 claims on Monday, and that doubled to about 80,000 on Wednesday. That night, he ordered residents to stay sheltered in their homes.
U.S. Treasury Secretary Steve Mnuchin told senators last week that unemployment could hit 20% — the highest since the Great Depression — without drastic measures. He later walked back the statement.
“The basic thing you guys have to do is to ramp up and get the checks out,” Burtless said. “You’ve got to fund this.”