Are state unemployment funds ready for battle with COVID-19?

After ordering restaurants and other gathering places closed to combat the COVID-19 pandemic, Minnesota Gov. Tim Walz told reporters March 16 that he understood the magnitude of his imposition.

“This will be the single largest request of unemployment insurance in Minnesota’s history,” he said.

Is Minnesota ready? It depends on whether this historic request is the harbinger of a major economic downturn or if the pain is short-lived.

At the beginning of the year, the trust fund Minnesota uses to pay unemployment benefits stood at $1.7 billion, according to the U.S. Department of Labor. That’s 6 percent shy of the amount the federal government calls “solvency.”

Solvency is published as a concrete measure of the fund’s ability to cover future payouts. At best, it’s an estimate of the unemployment funds needed if the economy stumbles. The difficulty, however, is estimating how far the next stumble will be.

Current solvency benchmarks are based on the average of the three biggest annual payouts over the past 20 years. In Minnesota’s case, those payouts were in 2009 and 2010, at the tail end of the Great Recession, and 2002, the end of the preceding recession.

Among the six states in the Federal Reserve’s Ninth District, Wisconsin is the only other state in the same boat as Minnesota. Its trust fund, at $2 billion, is at 97 percent of solvency.

Nationwide, 42 percent of states and jurisdictions are short of solvency. Among the worst are populous states such as California, New York, Texas, and Illinois.

Regardless of solvency levels, however, unemployed residents still get paid the benefits owed. What’s at stake is the state’s finances afterward. States that run out of money, as Minnesota did in the aftermath of the 2001 recession and the Great Recession, must borrow from the U.S. Treasury. They must then repay the debt within two to three years or risk higher federal unemployment taxes for their employers.

Employers pay into the trust fund in the form of state unemployment taxes based on the number of workers on their payroll. Typically, taxes are raised when the fund is drained after a recession and lowered once the fund is replenished. In many states, policymakers, keen to encourage new jobs, cut taxes before the funds are replenished to solvency level.

That had been the pattern in Minnesota for decades until state lawmakers reformed unemployment taxes just prior to the Great Recession. Afterward, those taxes allowed the state to quickly replenish the fund. But the surplus got big enough—it reached 106 percent of solvency at the start of 2016—that lawmakers decided to require that unemployment insurance tax rates be cut once the state reached 104 percent.

An additional reason for rate cuts, along with full solvency of the trust, was the fact that initial unemployment claims in Minnesota—and across the nation—had been trundling steadily lower as unemployment fell and job demand remained robust. Weekly unemployment claims at the end of February were about 3,400—slightly higher than last year, but lower than in 2018. Claims for the month of February this year are about 20 percent lower than in 2015.

Still, some states have been willing to build larger cushions in their trust funds despite similar trends. For example, South Dakota’s trust fund stands at 181 percent, Montana’s 153 percent, North Dakota’s 119 percent, and Michigan’s 114 percent.

What happens next?

Walz’s order affects a broad range of businesses, including restaurants, bars, movie theaters, bowling alleys, and golf clubs. It expires in 10 days, but is subject to extension, and extensions appear likely in the current environment.

That could mean a lot of jobs lost. Minnesota’s hospitality and leisure industry employs one of 10 Minnesota workers and pays 4 percent of the total payroll in the state, according to the state Department of Employment and Economic Development. In 2018, the latest full-year data available, they earned $6.6 billion.

Along with the order to close gathering places, Walz also ordered eligibility requirements for unemployment benefits to be loosened, which means many more workers will likely get paid by the state.

As a result, Minnesota’s unemployment insurance trust fund will start to see higher payouts than it has been seeing in recent years. Whether it’s enough to avoid federal borrowing—like during the Great Recession—will depend on how employers handle the shock of the COVID-19 outbreak.

Early estimates from state officials nationwide suggest that state jobless trust funds will be under significant pressure as new unemployment claims come in from the immediate closure of many businesses, which will likely be followed by secondary claims as that economic event ripples outward to other businesses.

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