Led By California, States Borrow From Federal Gov’t to Cover Unemployment Benefits - What’s the Status of State 'Rainy Day Funds'?

What’s the story?

• California recently became the first state since the 2007-2009 recession to borrow money from the federal government to fund an unemployment system that is overwhelmed by claims amid the state’s ongoing economic lockdown to combat the coronavirus (COVID-19) pandemic. 
• A Treasury Dept. spokesman told The Wall Street Journal on Monday that California was approved to borrow up to $10 billion through July. The state received $498 million of that amount in April and $4 billion for the month of May. Several other states have since received federal aid for this purpose, with many facing severe shortfalls in their unemployment systems and the potential depletion of their rainy day funds.
• These loan approvals come against the backdrop of Congress debating how much additional funding state governments should receive in a federal aid package, and whether it should only cover shortfalls stemming from the pandemic or if it should extend to other, longer-standing budgetary issues like underfunded pensions. Governors are requesting $500 billion in “unrestricted fiscal support” in addition to the $150 billion in federal funding Congress provided under the CARES Act to address pandemic-related expenses.

What’s the status of state unemployment programs?

• While California is the first state to actually begin borrowing from the federal government to fund its unemployment program this year, it won’t be the last. 
• Loan applications were approved for Illinois ($12.6 billion total, $5 billion in May) and Connecticut ($1.1 billion total, $215 million in May) before the end of April.
• As of May 4th, New York ($4 billion total, $1.2 billion in May), Hawaii ($510 million in May), Massachusetts ($1.2 billion total, $900 million in May), Ohio ($3.1 billion total, $700 million in May), Texas ($1.8 billion in May), and West Virginia ($125 million in May).
• The repayment of these loans in most cases will require interest payments if the balance isn’t repaid by the end of 2020.

Why are states having to borrow to fund their unemployment programs?

• During the last recession, 36 states had to borrow from the federal government to fund their unemployment programs, and the pandemic related shutdowns have caused unemployment claims to spike at an unprecedented rate.
• The Tax Foundation conducted an analysis of state unemployment trust funds’ solvency levels as of April 2020 using the Labor Dept.’s evaluation method, which divides states’ reserve ratios by the average benefit cost rates to determine its solvency level.
• It found that many states’ unemployment programs were severely underfunded to deal with a downturn, let alone one with the dramatic and sudden spike in unemployment seen in the pandemic. 
• As of April 25th, the unemployment trust funds in Massachusetts, New York, Ohio, and West Virginia could only cover one week of benefits; while those in California, Connecticut, Kentucky (which hasn’t sought a federal loan yet), and Texas could only cover two weeks of benefits; and Illinois could only cover three weeks of benefits.
• Not all states’ unemployment trust funds were in immediate need of a federal loan: the top three most solvent were Wyoming (49 weeks of benefits), Alaska (31 weeks), and Oregon (30 weeks).

What’s the status of state rainy day funds?

• All 50 states have revenue stabilization funds, or “rainy day funds”, that have money set aside as savings for when there are budget gaps, volatility in economic conditions or tax revenue (like the current pandemic-driven economic contraction), or forecast errors. Conditions for withdrawal vary from state-to-state, and a handful of states allow withdrawals for any reason.
• The Tax Foundation analyzed each state’s rainy day fund in April 2020 using the most recently available data, and in many cases states’ rainy day funds were sufficient to only cover a small percentage of its general fund spending. 
• Of the states that have been approved for federal loans to shore up insolvent unemployment trust funds as of May 4th, the rainy day funds are a mixed bag.
• On the profligate end of the rainy day fund spectrum, the Illinois rainy day fund could cover 0% of general fund spending which tied for the worst in the nation; while New York’s ranked 44th at 3.2% and Hawaii’s 39th at 4.8%
• In the middle ground, Massachusetts ranked 20th at 9.5% of general fund spending and Ohio ranked 29th at 7.7%.
• On the more robust end of the rainy day fund spectrum, West Virginia ranked 5th nationally at 16.9% of general fund spending, Connecticut 6th at 15.3%, California 9th at 13%, and Texas 10th at 12.9%.
• Of the states that haven’t sought federal loans to shore up their unemployment trust funds, several had impressive rainy day funds saved up: Wyoming led the way with a rainy day fund comprising 109% of its general fund spending, followed by Alaska at 52.6%, and North Dakota at 30%.

— Eric Revell

(Photo Credit: iStock.com / AndreyPopov)