Nearly half of states don’t have enough funds to pay all those unemployment claims

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Even as states are struggling to process a record number of jobless claims, experts warn that even greater challenges loom: A Labor Department report found that, as recently as February, unemployment insurance trust funds in nearly half the states were underfunded.

The staggering 6.6 million jobless claims filed last week call into question even the best-funded states’ ability to pay unemployment benefits over a sustained period, said Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center, making it likelier than not that more federal intervention will be needed.

“We’re talking about 10 million people filing for unemployment insurance in two weeks. Nobody is prepared for that,” he said. “That’s unprecedented.”

Alon Ozer, chief investment officer at Omnia Family Wealth, said: “The flood of unemployment claims is something no state was planning for. I believe many states will still require federal aid.”

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The anticipated intervention would come on top of the additional unemployment insurance support included in the Coronavirus Aid, Relief and Economic Security (CARES) Act, which expands eligibility and access to payments.

According to the Labor Department, states are supposed to build up their reserves during economic expansions “in anticipation of paying a higher amount of benefits during recessionary periods.” Ozer said low interest rates and the strong economy leading up to the crisis gave states time to refortify unemployment insurance trust funds depleted by the Great Recession, but the numbers suggest that some states didn’t do enough to ensure solvency even in a more run-of-the-mill downturn.

“The flood of unemployment claims is something no state was planning for. Many states will still require federal aid.”

Daniel Zhao, senior economist at Glassdoor, said: “The real concern is the long-term impact here. Some states are still struggling to return to pre-Great Recession funding levels a decade afterwards.”

The Labor Department’s report found that 22 states fell below the threshold for the recommended minimum adequate solvency level, including Pennsylvania, Ohio, Massachusetts, Texas and California — the five states with the highest weekly jobless claims.

“Because states have to balance their budgets, they are stuck between a rock and a hard place right now,” Zhao said. “The CARES Act does provide some federal funding in order to support unemployment benefits, but at this point, the question is where is that money going to come from. Either spending on other benefits is going to have to decrease or taxes are going to have to increase … or the federal government is going to have to expand funding.”

Gleckman said it likely will be a little while before states can even begin to assess the full magnitude of their unemployment insurance payment obligations as reports of backlogs, long lines at offices and computer system crashes continue across the country. It’s probable that many state agencies are facing staffing shortfalls because of coronavirus, as well, he said.

“In some places, the unemployment office staff is probably sick or not coming to work. There’s a demand side problem and a supply side problem,” Gleckman said. “This is going to be a tremendous challenge.”

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And it’s a challenge likely to remain undefined in the near term. The unknown trajectory of the virus in the coming weeks and months renders accurate forecasting nearly impossible, Ozer said.

“It very much depends on the length and the magnitude of the crisis,” Ozer said. “At this point there’s much more unknown than known.”

Gleckman predicted that “the states are going to be back to the feds for more assistance.”

“The goal is going to be to help them get out from under this enormous burden they’re going to have to face,” he said. “I think the CARES Act is just the first tranche.”



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