High Cost of Joblessness

Borrowing is up as state funds run dry

Even as some Administration officials cited signs that the recession may be nearing an end, new government statistics were measuring the toll the slump has taken. The Labor Department reported last week that one out of every five American workers, or 23.4 million people, were out of work during part of 1981; that is 2 million more than in the previous year. The Census Bureau also noted that 32 million Americans, or 14% of the population, lived below the poverty line in 1981 ($9,287 for a family of four), the highest poverty rate since 1967, when 14.2% of all Americans were officially poor. Both sets of statistics reflect the nation's current 9.5% unemployment rate, the highest in four decades, which is now threatening a number of industrial states with a new financial crisis.

In the first half of this year, ten states had to borrow a total of $2.37 billion from the Federal Government in order to pay basic benefits to their jobless workers. For all of 1981, nine states borrowed only $1.6 billion. These loans, coupled with unpaid balances incurred during earlier downturns, have pushed the total indebtedness for 16 states, plus Puerto Rico, the Virgin Islands and the District of Columbia, to $7.8 billion. That figure is expected to grow to $9.5 billion by year's end, and more states are likely to join the list of loan seekers before the recovery gets under way. Moreover, strict new federal rules governing these debts threaten to keep many state unemployment funds on the edge of insolvency unless drastic steps are taken. Those steps could include the reduction of benefits for unemployed workers and income tax increases.

In the present system, employers pay unemployment insurance premiums into state trust funds, which provide laid-off workers with benefits that average about $118 a week (for a single worker) across the nation. The back-to-back recessions of the past decade, combined with persistent unemployment in many industries, have dried up the trust funds of many states, forcing them to borrow from the Federal Government in order to keep on paying workers' benefits. More than half of the debt due the Federal Unemployment Compensation Trust Fund, for example, is owed by four big industrial states: Illinois, with 10.6% unemployment; Michigan, with the nation's highest jobless rate of 14.3%; Pennsylvania, at 9.8% joblessness; and Ohio, where unemployment is 11.1%. Each of the first three states owes $1.6 billion, while Ohio is $1.1 billion in the red.

Labor Department officials argue that the states are partly to blame for their troubles, since some of the biggest borrowers pay the highest benefits. Ohio, for example, pays $233 per week to a displaced worker with four dependents, which is one of the most generous benefits in the country. By contrast, neighboring Indiana, racked by 11.4% unemployment, pays $141 for the same size family, and has never had to borrow from the federal fund.

Several states have tightened eligibility rules and hiked employer taxes as their funds dried up, but they still find themselves increasingly in debt to Washington. One reason: state officials are reluctant to overtax businessmen, who may then decide to relocate to a state with lower taxes, thus throwing even more people out of work and shrinking the tax base. Says William Heartwell, executive vice president of the Interstate Conference of Employment Security Agencies: "With the economic competition between states today, anyone who passed a tremendous employer tax would suffer a devastating impact."

In order to force indebted states to take whatever steps may be necessary to solve their benefit-payment problems, Congress last year imposed a 10% interest penalty on all funds borrowed from the Federal Trust after April 1, 1982. Previously, such loans were interest free. As a result, some states will soon face a staggering debt load. Ohio, which will owe $2 billion by mid-1983, expects to pay $100 million in interest alone in 1983, and $200 million more in 1984. Since federal law prohibits the use of state unemployment funds to pay these costs, the states will have little choice but to slash services or hike income taxes, or both. Warns Tom West, an economist for the Michigan Employment Security Commission: "Without any changes in the law it's going to be at least ten years before the system becomes solvent again. And it's going to be very painful not only for the employers, but for the claimants, and for the general taxpayers in the state."

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