Alaska’s Unemployment Insurance Fund: Strong and Solvent
Red Ink States: federal loans to state UI trust funds, Dec 2009
Alaska, like all other states, has a trust fund at the center of its Unemployment Insurance (UI) financing system. The fund receives taxes paid by employers and workers, and pays out benefit payments to qualified workers during periods of unemployment. The fund maintains a reserve to carry the system through a severe recession until it can be rebuilt afterward. Alaska is one of a few states with a sound fund. Most others are insolvent or facing solvency problems.
Today half of the states have tapped out their funds, and are using money borrowed from Uncle Sam to keep their UI systems afloat. These are the “red ink” states of 2009. So far, the 25 states have borrowed $23.7 billion in total from the federal government. Many of these states probably would have handled a typical recession just fine, but were caught far short when a big one hit.
Alaska’s fund is fully solvent, and at tax computation time (November 2009) was meeting its solvency goal. The fund has more than $300 million. The average UI tax rate for employers in 2010 will be the second lowest on record, following the record low tax rate of 2009. Alaska’s situation is due to the good design of our financing system, as well as the fact that Alaska is not under the severe economic stress of some states.
However unfortunate it is to see the condition of the rest of the USA, it is reassuring to know that the State of Alaska has managed its UI funds well.
Do the red ink states have to repay these loans, or will the federal government just write it off to our increasing deficit?
Thanks for your question. In short, states are required to pay back advances from the federal government. Because a state can’t quit paying UI benefits without repercussions under federal law, when a state realizes that its UI trust fund is at risk, it has several options:
• find money to cover the fund elsewhere in the state budget
• change the contribution and payment structure of its UI system
• borrow money from the federal government.
For most states the last option is often the quickest way to deal with a looming shortfall.
A state governor must request an advance from the Secretary of Labor. When the Secretary of Labor determines what amount the state is qualified to receive, funds are transferred from the Federal Unemployment Account (FUA) to the state.
Federal law requires the advances be repaid according to specific deadlines. Under current federal law, if a state does not repay the advance within the specified deadline, the federal government will gradually reduce the tax credit on employers (one of the “carrots” used to entice states to participate in the federal-state UI system) and use those funds to repay the debt.
Under the Assistance for Unemployed Workers and Struggling Families Act, which was part of the 2009 stimulus package, interest on the advances to state accounts is waived through December 31, 2010.