States are cutting unemployment benefits to avoid a debt crisis. It won’t work.
Job numbers are tepid. Unemployment benefit claims are still on the rise. But cash-strapped states have already begun scaling back unemployment insurance benefits and restricting eligibility. The trouble is, even slashing benefits won’t solve states’ debt problems before collectors come knocking in September for interest payments on the money they borrowed at the start of the recession.
In 2011, six states made “unprecedented cuts in the duration of benefits” to less than the prevailing 26-week standard, according to a report by the National Employment Law Project, a nonprofit advocacy group for low-wage and unemployed workers. South Carolina, Missouri and Michigan have cut their programs to 20 weeks, while Arkansas and Illinois have reduced them to 25 weeks. Federal benefits kick in only after workers have received state benefits for a set period, so the state-level changes will also exclude more workers from the federal pool.
What’s more, states have imposed new eligibility restrictions, excluding some of the lowest-wage workers from receiving benefits. Take Pennsylvania: In June, new legislation kicked in that raised the weekly qualifying wage for jobless benefits from $50 to $100, starting in 2013, then to 16 times the minimum wage in 2015, the NELP report says. The law also excludes workers who have fewer than 18 weeks of qualifying wages. In other words, workers at the very lowest rung of the pay scale—who may be working the least number of hours and who’ve been gainfully employed for less time—will be among the first to see their benefits axed.
Other new restrictions clamp down on behavior inside and outside the workplace, excluding some workers who have lost their jobs due to absenteeism, even if due to illness, who have refused drug testing or who have tested positive for drugs.
What’s behind this push? States are grappling with insolvent trust funds for unemployment insurance that could snowball into even bigger fiscal problems if they don’t take draconian steps to address them. When the 2008 recession hit, many states borrowed heavily from the federal government to deal with the spike of jobless benefit claims, totaling $40 billion in July 2011 and expected to rise even further. Even before the recession, many states were giving employers tax breaks and didn’t shore up the trust fund to prepare for trouble, leaving them even more vulnerable. Like the federal government, the states, too, are facing their own debt crises.
On Sept. 30, the NELP notes, 30 states will be forced to make their first interest payments on those federal loans. To help make their programs solvent going forward, states can increase the unemployment insurance tax on employers or scale back benefits. Many are choosing to do the latter first for fear of burdening businesses. If they don’t take action, businesses will face an automatic surcharge of $21 per employee to pay off the loan.
But major reductions in benefits won’t help states make their looming interest payments this year. States are required to find revenue outside the trust fund to make these federal interest payments in September and pay back the loan. Some states, like New York, have passed an additional employer tax that goes up to $21.25 per employee to pay off the interest. Others object that such taxes burden businesses already struggling to stay afloat in a grim economy.
In response, Washington lawmakers have floated two kinds of proposals to address the state-level solvency crisis. President Obama and Senate Democrats want to waive federal interest payments and an employer tax increase for two years for states. In 2014, employers would face a tax increase. Republicans Sen. Orrin Hatch (Utah) and Rep. Dave Camp (Mich.) pushed their own proposal in the JOBS Act of 2011, which would give states a lump sum of $31 billion in unemployment funds to use as they please.
The Hatch-Camp bill also gives states far more leeway to reduce unemployment benefits or eliminate them entirely for the long-term unemployed. That’s a bigger policy battle that federal and state legislators will have to sort out, balancing benefits to employers vs. benefits to workers. But it’s clear that even the most drastic benefit cuts won’t help states get out of the red anytime soon.