Recession Readiness and State UI Trust Funds

August 22nd, 2019 at 5:25 pm

[My colleague Kathleen Bryant took the lead on this piece–JB]

Given the recent dramatic spike in media coverage of our economic headwinds and recession readiness over the past week, we decided to take a closer look at the balance sheets of state unemployment insurance (UI) trust funds. While the Department of Labor (DOL) is responsible for overseeing the UI system and paying administrative costs, the basic program is managed and mostly funded by the states. Using the most recent final data available from the Treasury Department, we analyzed the number of state UI trust funds that meet DOL’s recommended minimum solvency standard. This standard is measured using a ratio called the  “Average High Cost Multiple,” where a value of 1 means that trust fund reserves could pay out at least 1 year of benefits during a recession of average depth– states with an AHCM greater than 1 have met DOL’s recommended minimum solvency level.

There are 18 states that have not met DOL’s minimum solvency standard (as of July 2019), including some of the most densely populated states in the country– California, Texas, and New York. Congress should be closely monitoring the balance sheets of state UI trust funds and should be prepared to ramp up federal spending on UI when the next recession hits, considering the financial status of many state trust funds.

Source: The Department of Labor, the Department of Treasury

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4 comments in reply to "Recession Readiness and State UI Trust Funds"

  1. Bob Palmer says:

    I don’t see any obvious correlation between a state’s UI courage ratio and my general impression of its economic well being. I mean, like, California? Great economy, but very little in the kitty for a rainy day? But Oregon, with Portland doing well, has put away ten times as much. State politics probably accounts for the difference. Not reassuring.

    • Jared Bernstein says:

      One issue to consider is how much the state had to borrow from the feds to pay for UI in the last downturn. I know CA borrowed a lot, as it was hard hit. That may be in play here.

      • Kevin says:

        So that would imply that there is a lot of moral hazard baked into the system and California has no moral inhibitions? If the Federal Government will lend enough to bail out an underfunded UI system, California, will underfund the system?

  2. Ken Houghton says:

    Quibble: Those are not densely populated states; they are highly populated. (Texas is basically central Canada without the Good Samaritan laws.)

    More likely that Oregon doesn’t pay benefits that are as population-sustainable as California. (Which doesn’t explain why New York has half the ratio of New Jersey; the former pays very poorly compared to the latter based on GDP per capita.)