Unraveling the Unemployment Insurance Lifeline

Responding to Insolvency, States Begin Reducing Benefits and Restricting Eligibility in 2011

State lawmakers enacted a range of policies in 2011 to amend their unemployment insurance (UI) programs, most of them motivated by insolvent state trust funds. Most notably, six states passed unprecedented cuts in the duration of benefits, for the first time reducing benefit weeks to less than the decades-long accepted standard of 26 weeks. In addition, states altered benefit formulas to reduce average check amounts and tightened UI eligibility requirements. In a number of states, legislators exploited the need to enact a technical fix to authorize temporary federal extensions, using it as an opportunity to extract permanent state UI program cuts. Much of the legislative debate this year was marked by open attacks on the character of workers who rely on unemployment insurance during this prolonged economic downturn.

This September, 30 states will face their first federal interest payments on historic levels of UI trust fund loans—borrowing that was necessary in order to cover benefit payments during the worst recession the UI program has ever faced. This record borrowing comes on the heels of three decades of declining trust fund solvency, during which time many states adopted “pay as you go” financing or kept UI taxes low despite rising wages—an approach that left them unprepared for even a mild recession, much less a downturn of the magnitude experienced since the end of 2007. In contrast, states that adhered to proven “forward financing” principles maintained solvent trust funds despite record layoffs and declining employment.

The interest payments coming due for states—and the corresponding imperative they create to increase employer assessments—mean that unless there is effective federal intervention, the national solvency crisis will continue to fuel a legislative climate in the states that will erode years of overall positive changes in the UI program.

This report is a summary of state UI legislation for the first six months of 2011. It begins with a discussion of the conditions surrounding the legislative changes this year. Despite record federal borrowing, only two states implemented UI financing reform to strengthen their systems in the future. A handful of states pursued half measures, such as mitigating or cancelling tax increases. More often, states favored damaging cuts to program benefits and eligibility. Our report then describes the 2010 year-end amendment to the federal Extended Benefits law, which provided states with a mechanism to lengthen the period they are eligible for the program. Perversely, states’ take-up of this temporary policy change to preserve federally financed extensions (known as the three-year “EB look-back”) became a vehicle for legislators under pressure from business groups to enact unfavorable measures that permanently altered their UI programs, much to the detriment of unemployed workers and the programs’ intended stimulative effect. Finally, this report addresses the need for intervention from the Administration and Congress in order to prevent similar cuts in 2012, and to provide states with a framework for achieving long-term solvency.

Download the complete report below. 

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About the Authors

Claire McKenna

Senior Policy Analyst, National Employment Law Project

George Wentworth