The funds states use to pay unemployment benefits are running low, raising fears of higher taxes on businesses and less money to help out-of-work employees during tight economic times.
Thirty-three states have funds below recommended levels, meaning they're at risk of running out in less than a year unless they're replenished as required under federal law. Nearly half the states could run out in less than six months.
The funds, totaling about $38 billion today, are in worse shape than before the last recession, when the total was about $54 billion.
"Many states have not built their unemployment trust funds back to levels adequate for even a mild recession," said Terry Shawn, a spokesman for the U.S. Department of Labor.
States can't skip paying unemployment insurance benefits to out-of-work employees, meaning they must borrow money if the funds get too low.
Finding the money to repay those loans can mean dipping into other state resources, hitting employers with surcharges or eventually reducing the benefits provided to laid-off workers, which is allowable within limits.
The problem couldn't come at a worse time for many states, as the anemic economy continues to keep tax revenues low and pushes many statehouses into recession mode.
"One of the risks the system faces is cutting benefits at a time when they're needed the most," said Wayne Vroman, an economist at the Washington, D.C.-based Urban Institute.
In California, the fund will hit a low of about $1.1 billion by year's end and is predicted to be insolvent next year, requiring some borrowing by the state. Benefit payments are expected to hit $2.6 billion by the end of next year.
In New York, the fund stands at about $694 million, compared to potential payouts that could top $3 billion.
In Michigan, suffering from the nation's highest annual unemployment rate, the fund is at a paltry $2.8 million. The state has already had to borrow money to keep the fund in the black for the past two fiscal years.
In Ohio, the trust fund is at about $529 million, well below the state's recommended safety level of about $2.3 billion.
"Unless anybody can tell me there'll be a major increase in employment in the next six months in the state, the employment trust fund is going to be in trouble," said Andy Doehrel, president of the Ohio Chamber of Commerce.
Meanwhile, states with healthy unemployment funds are wary about making changes to the benefits they pay out, worried about the effect on their bottom lines.
Such a debate unfolded in Mississippi this spring as the governor and lawmakers worked out a deal to raise the weekly maximum weekly unemployment benefit from $210 to $235 by 2009. Businesses said that raising the benefit could diminish the fund balance, requiring new taxes on companies that would hurt their profits.
One problem with unemployment funds is that the way they raise money in many states hasn't kept pace with inflation.
In California, for example, companies pay unemployment taxes on a worker's first $7,000, a figure that hasn't changed since 1984. But the benefits California pays out have risen considerably since then.
Higher unemployment also is adding strain, with more people making jobless claims. "More claims ... are more of a drain on the trust fund's reserves," said Nancy Dunphy, employment security deputy commissioner at New York's state Labor Department.
The financial picture continues to look dim for states. The Rockefeller Institute for Government reported this week that adjusted state tax revenues remained in decline for the third quarter in a row and that sales tax collections were flat for the first time in six years.
A midyear survey of state finances by the nation's state budget officers found that 18 states reported their upcoming budgets will be smaller than spending plans for the current year.
The bad news worries state government budget forecasters, who point out the unemployment funds never fully recovered from the last recession.
"Even during the uptick in the economy and doing reasonably well in terms of state revenues, these funds were not replenished," said Sujit CanegaRetna, senior fiscal analyst with the Council of State Governments. "Which just goes to show the kinds of pressure states face on a number of fronts."