Matt Weidinger
May 4, 2020 - AEI
California has become the first state to borrow federal unemployment insurance (UI) funds to continue paying promised state UI benefits, according to the latest report from the Treasury Department. States deposit unemployment payroll taxes in accounts that are drawn from to pay regular UI benefits. Under federal law, states that exhaust their UI trust funds are still required to meet benefit obligations and may borrow from the federal government to do so.
Federal loans normally must be repaid with interest in future years. But under the Families First Coronavirus Response Act enacted in March, interest on federal loans is waived through December 31, 2020. This temporary interest-free treatment was last provided to states in the wake of the Great Recession.
According to the Wall Street Journal, California has been authorized to borrow $10 billion and has already tapped $348 million. The Golden State will not be alone for long: “The U.S. government has also approved loans of up to $12.6 billion for Illinois and up to $1.1 billion for Connecticut through the end of July.” New York, Massachusetts, and Texas also recently “notified the federal government of their anticipated need for loans.”
The aggregate balance of state trust funds was $75 billion in December 2019, and 31 states had balances that the Department of Labor considered・a rel="noreferrer noopener" href="https://www.aei.org/poverty-studies/is-the-unemployment-insurance-system-ready-for-the-next-recession/" target="_blank">sufficient》o weather a typical recession for one year. But this is no typical recession, with an unprecedented 30 million people filing initial unemployment claims in the past six weeks.