By Michael Lucci, Senior Policy Advisor

Congress appropriated $195.3 billion in aid to state governments as part of the American Rescue Plan Act (ARPA), rounding out an unprecedented year of financial support for state and local governments. Indeed, policymakers will be challenged to find productive uses for this new round of aid, which comes on top of generous tranches of federal cash support throughout 2020. States should leverage this aid by replenishing their unemployment insurance trust funds, which have manifest need after incurring a net $93 billion in losses since before the pandemic began.

Understanding the condition of state unemployment insurance trust funds

States are required by the Social Security Act of 1935 to maintain unemployment insurance trust funds. These funds are used to pay out jobless benefits to qualifying unemployed workers. Unemployment trust funds are an area of state finance most severely impacted by the pandemic and the associated job losses, given that states had to pay out extraordinary claims due to dramatic increases in unemployment in 2020. As states recover from the pandemic, they will face the challenge of refilling these required funds to meet future needs and avoid long-term financial strain.

Unemployment trust funds are financed by payroll taxes on employers. Thus, states increase payroll taxes in order to replenish depleted unemployment trust funds. However, the last thing local economies need is a payroll tax increase as businesses begin to rehire displaced workers.

With ARPA funding, states have an opportunity to refill unemployment insurance funds without increasing the payroll tax burden on local employers. In fact, government public health orders caused much of the pandemic-related unemployment, so it makes sense that government aid be targeted toward replenishing unemployment trust fund balances.

Treasury Department’s guidance for use of ARPA aid explicitly allows states to use the aid to replenish their unemployment insurance trust funds back to the levels they had on January 27, 2020. The guidance comes in the form of an Interim Final Rule, and unemployment trust funds are covered on page 32:

State Unemployment Insurance Trust Funds

Consistent with the approach taken in the CRF, recipients may make deposits into the state account of the Unemployment Trust Fund established under section 904 of the Social Security Act (42 U.S.C. 1104) up to the level needed to restore the pre-pandemic balances of such account as of January 27, 2020 or to pay back advances received under Title XII of the Social Security Act (42 U.S.C. 1321) for the payment of benefits between January 27, 2020 and [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER], given the close nexus between Unemployment Trust Fund costs, solvency of Unemployment Trust Fund systems, and pandemic economic impacts.

Unemployment insurance trust fund depletion by state

Two measurements show the $93 billion depletion of UI trust funds:

1. First, the current account balance for each state can be compared to the same account balance on February 1, 2020.  This comparison shows a $40.6 billion net drawdown on these UI funds over the course of the pandemic.
   
2. Added to this is a straightforward view of Title XII outstanding advance balances, which shows state borrowings from the federal government to continue paying UI claims after the state UI trust fund was depleted. Once the state’s UI trust fund is depleted, it begins borrowing from the feds as summarized under Title XII outstanding advance balances. States have $52.7 billion in outstanding advance balances under Title XII of the Social Security Act.

The chart below shows the depletion of UI trust funds by state, comparing their balances as of May 19, 2021, with their balances as of February 1, 2020. Forty-four out of 50 states have lower current UI trust fund balances than they did before the pandemic. In aggregate, state fund balances fell from $73.7 billion to $33.4 billion.

State unemployment insurance fund losses include borrowing from the feds to pay claims

A comparison of current fund balances to February 1, 2020, fund balances does not show the full picture of losses. In addition, distressed states have borrowed from the federal government to continue paying out UI claims. These borrowings must also be added up to calculate the total losses. In sum, 18 states have $52.8 billion in outstanding balances and advance drawdowns under Title XII, with more advance draws likely to be made this month.

Thus, states have aggregated a $93.3 billion loss against pre-pandemic trust fund balances of $73.7 billion. If all state UI trust funds were treated as a single fund, that fund would have been more than completely wiped out during the pandemic recession. In reality, though, only 18 states have been wiped out to the point where they needed to borrow from the federal government in order to pay claims. The borrowing list includes California, Texas, New York, Pennsylvania, Illinois, and Ohio, which are six of the seven largest states. Florida is the only large state that avoided borrowing.

California and New York in particular have taken severe losses. California has a $23.8 billion net loss against an original fund balance of $3 billion. New York has a $11.4 billion net loss against an original fund balance of $2.4 billion.

State governments are beginning to receive ARPA aid from the federal government. They should prioritize fully replenishing their unemployment trust funds and paying back any federal loans they took out to pay ongoing state jobless claims. Replenishing UI trust funds will restore fiscal balance to the area where states have experienced the worst fiscal shocks, and will prevent unemployment insurance payroll tax increases from be triggered due to depleted state trust funds. With private sector payrolls still seven million jobs below pre-pandemic levels, states should act quickly to prevent a tax increase on growing business payrolls.