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Washington • State officials had plenty of warning. During the past three decades, two national commissions and a series of government audits sounded alarms about the dwindling amount of money states were setting aside to pay unemployment insurance to laid-off workers.
"Trust Fund Reserves Inadequate," federal auditors said in a 1988 report.
It's clear now the warnings were pretty much ignored. Instead, states kept whittling away at the trust funds, mostly by cutting unemployment insurance taxes at the behest of the business community.
The low balances hastened insolvency when the recession hit, leading about 30 states to borrow $41.5 billion from the federal government to pay unemployment benefits to their growing population of jobless.
The ramifications will be felt for years.
In the short term, states must find the money to pay interest on the loans. Generally, that involves a special tax on businesses until the loan is repaid. Some states could tap general revenues, making it harder to pay for schools, roads and other services.
In the long term, states will have to replenish unemployment insurance programs. That typically leads to higher payroll taxes, leaving companies with less money to invest.
Past recessions have resulted in insolvencies. Seven states borrowed money in the early 1990s; eight did so as a result of the 2001 recession. Utah's fund went under in 1982-1983.
But the numbers are much worse this time because the recession was more severe and the funds already were low when it hit, said Wayne Vroman, an analyst at the Urban Institute, a liberal-leaning think tank based in Washington.
The Obama administration this month proposed letting states raise the tax on businesses or change unemployment benefits as a way of boosting depleted trust funds.
Businesses pay a federal and state payroll tax. The federal tax primarily covers administrative costs; the state tax pays for the regular benefits a worker gets when laid off. The Treasury Department manages the trust funds that hold each state's taxes.
Each state decides whether its unemployment fund has enough money. In 2000, total reserves for states and territories came to about $54 billion. That dropped to $38 billion by the end of 2007, just as the recession began.
During the next two years, reserves plummeted to $11.1 billion, lower than at any time in the program's history when adjusted for inflation, the Government Accountability Office said in its most recent report on the issue. Yet benefits have stayed relatively flat, or declined when compared with average weekly wages.
"If you look at it from the employers' standpoint, they're not going to want reserves to build up excessively high because then there's an increasing risk that advocates for benefit expansion would point to the high reserves and say, 'We can afford to increase benefits,' " said Rich Hobbie, executive director of the National Association of State Workforce Agencies.
A survey from Hobbie's organization found that 35 states raised their state unemployment taxes last year. Hobbie said he suspects that some states allowed reserves to dwindle out of complacency.
"We just got overconfident and thought we wouldn't experience the bad recessions we had in, say the mid-'70s," he said, "and then this big surprise hit."