The Recession of 2001 and Unemployment Insurance Financing

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Introduction

By the standard macroeconomic yardstick (the change in real Gross Domestic Product or GDP) the economic downturn of 2001 was one of the mildest of the past 50 years. Yet in mid-2004 several large states are experiencing difficulties in financing their unemployment insurance (UI) programs. To date, nine state UI programs have secured loans to pay UI benefits. The loans have been obtained from one or more of three sources: the U.S. Treasury, the private bond market and other agencies of state government. The U.S. labor market in mid 2004 continues to exhibit softness with unemployment averaging more than eight million persons during the April-June quarter despite measurable increases in employment. Should the economic recovery suffer new reverses, it is possible that other UI programs will have to borrow this year or in 2005.

Individual UI programs are following different approaches in addressing their funding problems. Strong interest is present in several states to utilize loan arrangements that depart from the traditional borrowing from the U.S. Treasury. Four states have already authorized borrowing with state-issued debt instruments and others may follow suit later in 2004. Additional states such as Minnesota might have issued state debentures absent state constitutional constraints on borrowing options. The potential savings on interest costs is a major reason why states are exploring various alternatives.

This paper has three objectives. 1) It will describe developments in the macro economy and labor market that have relevance for UI funding issues 2) It will describe the important developments in UI financing associated with the recession of 2001. 3). It will discuss and compare borrowing options available to states whose trust fund reserves are inadequate to finance benefit payments. The pros and cons of alternative borrowing arrangements will be evaluated.

States have several alternatives for financing UI trust fund deficits. The report describes the alternatives and the options already taken by some states. The objective is to identify options rather than recommend a "preferred" method of borrowing. In choosing a financing strategy, a state must consider factors such as state constitutional constraints and prohibitions, federal requirements for borrowing, the size of the funding problem, interest rates on alternative debt instruments and the terms and conditions of debt repayment.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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