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Aid to Jobless Devastating State Finances

Flood of applicants has left Missouri and others in dire straits. To make payments, they'll have to borrow from U.S. and consider tax hikes.

January 21, 2003|Stephanie Simon | Times Staff Writer

ST. LOUIS — The unemployment funds that provide benefits to laid-off workers will run out of money within months in Missouri and half a dozen other states -- the latest sign that the slumping national economy is devastating state finances.

Flooded with applications from jobless workers, unemployment insurance funds in Illinois, Missouri, Minnesota, New York, North Dakota and Texas are on the brink of -- or already deep into -- insolvency. Arkansas and North Carolina are on shaky ground as well.

Even when the funds are depleted, unemployed residents will continue to draw benefit checks. States will cover their obligations to the jobless by borrowing from the federal government.

But they must pay back those loans, with interest. And that often requires raising taxes on employers or cutting benefits to laid-off workers -- or sometimes, both.

"These states have gotten themselves in a pickle, and to get themselves out, they will have to shoot themselves in the foot even more," said Rick McHugh, an attorney at the National Employment Law Project, a nonprofit advocacy group for the poor.

Indeed, the prospect of higher taxes during an economic downturn infuriates business owners.

"It makes it difficult for small-business owners to make the decision to create new jobs," said Steve Woods, vice president of public policy for the National Federation of Independent Businesses.

They argue, instead, for a crackdown on abuses, saying states are spending too much money helping workers fired for drug abuse or absenteeism.

Labor advocates, on the other hand, say that any reduction in benefits will harm hundreds of thousands of men and women laid off through no fault of their own. With work so scarce -- the nation lost 100,000 jobs last month alone -- they argue that this is the wrong time to cut unemployment insurance.

Caught in the middle, state officials are scrambling to assess their options.

The prolonged weakness of the labor market has meant that more residents apply for unemployment benefits and need them for longer stretches.

In several states, among them Texas and New York, more than half the recipients draw the full 26 weeks of benefits to which they are entitled.

In other states, including Illinois and Missouri, the number of residents on aid for the full six months has doubled or nearly tripled over the last two years.

The result: Texas had to borrow $200 million from the federal government last month to cover unemployment checks written this winter.

Larry Jones, a spokesman for the Texas Workforce Commission, insists that the insurance fund is not on the rocks.

"It's alarming when reporters ... use the I-word. We're not insolvent. We're solvent, because we borrowed," he said.

"We don't use the B-word either, the one that starts with 'bank' and ends with 'rupt.' "

Still, he acknowledges that the commission will need to borrow an additional $500 million over the next few months so checks don't bounce this spring.

Texas, like many other states, has built into its tax code a series of "triggers" that lower taxes on businesses when the unemployment fund is flush and raise them when the fund is running low.

The fund's insolvency already has triggered one substantial tax hike; most employers will be paying an extra $58 per worker this year.

Jones said the additional fee should put the fund back in the black by year's end.

California also should avoid fiscal disaster, thanks to an automatic rate increase of $21 per worker -- the first jump in seven years.

In other states, however, the triggers are proving woefully inadequate.

In Illinois, an automatic tax hike of $18 per worker per year will not come close to boosting the unemployment insurance fund into solvency.

The fund was running a $2-billion surplus at the end of 2000.

By the end of next year, it's projected to be in debt by at least $1 billion, according to Jay Shattuck, who studies the issue for the Illinois Chamber of Commerce.

Desperate to stave off another tax hike, the chamber has asked its members for examples of fraud by jobless workers; anecdotes in hand, lobbyists will argue that tightening eligibility, not raising taxes, is the key to fixing the program's woes.

Missouri business lobbyists are taking a similar approach.

The state's unemployment fund has barely enough to cover three months of benefits.

And the automatic tax hikes required by law are so modest, the fund is expected to run a deficit through at least 2007.

"We'll take a look at whether there are any loopholes that workers are enjoying, that we might be able to afford if we were in a Cadillac situation, but can't afford now," said Kelly Gillespie, vice president of governmental affairs for the Missouri Chamber of Commerce.

"We want to take care of the folks who are truly deserving, but there are some who are hitting the system and draining the fund."

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