A tattered safety net for US unemployed

"Food stamps I'm not worried about – it's entirely federally funded," says Rebecca Blank, a senior fellow and economist at the Brookings Institution in Washington. "But I do worry about the healthcare programs and education. Medicaid is such a large part of the budget that it's easier to cut services."

Cutbacks in education could undermine an eventual recovery because that will mean fewer highly qualified workers, she adds, pointing to California's proposed $100 million cut for its state university system.

The state unemployment trusts are funded through the collection of payroll taxes and administered by the federal government under guidelines that require the money only be used to pay unemployment benefits, which average about $300 a week nationally. But the states still have considerable discretion over how much they pay into the system.

For instance, states are only obligated to tax the first $7,000 of a salary to fund their trust, says Mr. Emsellem of the National Employment Law Project. Increasingly, states have been sailing close to this minimum, under the assumption that the risks of a deep recession were outweighed by the benefits of encouraging industry. He estimates the average national "base" such taxes have been collected on has been $11,000.

"In the past 10 years in states like California, the employers were saying 'let's reduce taxes so we can extend payroll' and they got what they wanted,'' he says. "So even during the dot-com boom here during the '90s, we were hardly collecting more in revenue then we were in the previous decade. There's no big secret as to how we got here."

Indiana's troubles began about five years ago when labor unions and business clashed over a plan to cut payroll taxes, says state Sen. Luke Kenley (R). At the time, its unemployment trust was about $2 billion.

In the end, an actuary concluded that the system was overfunded beyond any foreseeable event, he says. That analysis convinced legislators not only to cut payroll taxes but also to increase benefits to those who were already unemployed. The trust started to deplete.

Then, unemployment worsened as oil prices surged, especially in places like Elkhart, the so-called "RV capital of the world," which saw demand collapse. The trust's funds fell 77 percent to $91 million in the past year.

"I was concerned at the time that we were kidding ourselves that we could increase benefits,'' Senator Kenley says.

Today, he anticipates the state will eventually raise payroll taxes again to fund the system, though the state's overall finances are sound, he adds. "We don't anticipate cutting services as much as we do 'spreading the pain' kind of ideas, like freezing wage schedules for all state employees."

States await Obama's recovery package

Only 38 percent of unemployed Americans receive benefits, Emsellem points out, so the problems with unemployment trust funds represent only a fraction of a growing need. The answer, he says, lies in more federal money. "What it all comes down to is the size of this whole recovery package that President-elect Obama and that Congress are putting together,'' he says.

Many states appear to agree. New Jersey's trust, despite a $260 million emergency loan from Washington five months ago, is about to borrow money again with just four months of money for benefits left.

"The scope of this may well have to be met at a federal level," says Kevin Smith, a spokesman for the New Jersey Department of Labor.

New Jersey, like Indiana, made a decision to deplete its fund in the 1990s, diverting $4.7 billion from it to other uses. New Jersey Gov. Jon Corzine, who says he put a stop to this practice when he took office in 2006, told the Star Ledger recently: "We have to pay that piper ... either by putting money into that system from some other place or we're going to have get help from the federal government."

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