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Unemployment insurance borrowing is not a key state problem

27 Oct 2010 by Jim Fickett.

States have had to borrow from the federal government in order to pay unemployment insurance claims. These borrowings have made the news now and then, adding to a long list of worries about the states. But the unemployment insurance trust fund problem, though discouraging, is relatively small and not worth too much attention from investors.

States have many debt problems. It is probably the case, however, that, compared to official borrowing and unfunded retirement obligations, all other debts are relatively small. I.e. one can understand the states' balance sheets pretty well looking only at official borrowing and retirement obligations. In this post we look at unemployment insurance trust fund borrowing.

I've seen several articles on UI trust funds, but was motivated to finally look into it when I saw an article on Minyanville by one Justin Rohrlich who, if his bio is to be believed, might be good at advertising. The article is astonishingly bad, with a new mistake in almost every sentence.

Funding of the unemployment insurance system is quite complicated (for a good overview see an April 2010 GAO report). The oversimplified story is that each state sets up its own tax on employers, and those taxes go to a UI trust fund, out of which claims are paid. If the trust fund has insufficient funds to pay claims, the state can borrow from the federal government.

As in many other areas, the states were supposed to set aside more in good times, but did not, and in the recent recession many had to borrow. According to a Department of Labor summary on the trust funds, outstanding loans to state UI trust funds totaled $41 billion as of 25 Oct 2010. It will get worse. According to the GAO report,

DOL estimates that state UI regular benefit outlays will be at $74.9 billion in fiscal year 2009 and $93.3 billion in fiscal year 2010, which is almost triple the amount of UI benefits paid out in fiscal year 2007. DOL has projected that trust fund account balances, net of loans, will fall to -$88.4 billion at the end of fiscal year 2012 before starting to grow again, with net balances not becoming positive until well beyond fiscal year 2014.

If the aggregate net balance falls to -$88 billion, then loans are more than that, but probably not too much more, since the majority of states have negative balances. So apparently the full extent of the bad news in this department is a cumulative debt somewhere in the neighborhood of $100 billion. This is not a small amount of money. On the other hand, it is only about 2.5% of the total of the two main debt categories: the $3 trillion in unfunded retirement obligations plus the $1 trillion in state debt as counted by Census. (Note: Census figures do not include the state UI trust fund debt or unfunded retirement obligations).

What about cash flow? There is no deadline for the states to pay back their borrowings, but there is interest: a recent interest rate was 4.6%. Some short-term borrowings are interest free, and the American Recovery and Reinvestment Act temporarily made all borrowings interest free through the end of 2010. Presumably this interest rate, like others, is falling, but suppose that states had to pay 4.6% on $100 billion in borrowings at some point. This would add $4.6 billion to current state budgets, which total about $1.3 trillion, a change of about one third of one percent.

If you are a state governor or legislator this is certainly a problem you have to understand and help solve. In the role of taxpayer or investor, however, your time is better spent understanding the retirement obligations problem.