Saying No To Stimulus Makes Cents For Many States

Free money beats borrowing, especially if you're unemployed. But officials in many states have decided that they'd rather borrow billions than accept federal grants to help pay unemployment benefits.

The stimulus package — signed into law one year ago Wednesday — includes $7 billion for states that change their unemployment insurance rules. Most states offer benefits only to people who've been laid off from full-time work. The stimulus money kicks in if states are willing to pay benefits to broader groups of people, such as part-time workers and those who have had to leave jobs for compelling family reasons.

Stimulus Snapshots

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But so many states have refused the money — 18 have spurned it altogether, with many more changing their rules just enough to qualify for partial funding — that more than $4 billion remains in federal accounts. The Department of Labor sent out a plaintive public reminder to states last month: Take this money, please.

"This is their money that they're entitled to," said Jane Oates, assistant secretary of labor for employment and training. "All they have to do is pass a law."

A Piggy Bank Tapped Out

It's not that states can't use the cash. States pay for unemployment by taxing employers. The idea is that their unemployment insurance trust funds should build up enough cash during good times to see them through recessions.

It doesn't work out that way. Few states can resist the temptation to tap into their trusts when times are good. They either cut taxes on employers or spend a good chunk of the money on more generous benefits or other programs altogether.

"It becomes a little piggy bank that they can raid to do other things," said Phillip Levine, an economist at Wellesley College.

As a result, a total of 28 states and territories have borrowed $31.5 billion from the federal government to make up deficits in their unemployment accounts. The Labor Department predicts that by 2012, all but eight or 10 states will come looking for loans, to the tune of $90 billion in all.

Philosophical And Pragmatic Reasons

So why are so many states unwilling to accept the stimulus dollars, which they wouldn't have to pay back? There are two reasons, says Rich Hobbie, executive director of the National Association of State Workforce Agencies: "pragmatic and philosophical."

The philosophical reasons were very much on display last spring, when several Republican governors, including Rick Perry of Texas and Bobby Jindal of Louisiana, turned the issue into a political football. They called the demand that states change their unemployment laws a "federal intrusion" on their authority.

But, as Hobbie points out, the continuing opposition from governors — not all of them Republicans — isn't based purely on ideology. The stimulus dollars don't have to be paid back, but they aren't exactly free, either.

Expanding coverage means states would be paying out more in benefits long after the stimulus funds have run out. "At some point, the state will have to cover it through higher taxes," Hobbie said.

In Florida, where the unemployment rate is close to 12 percent, the Legislature has turned aside a bill that would have made the state eligible for as much as $443 million in federal aid. Expanding benefits broadly enough to qualify for the full federal payout would end up costing the state an estimated $100 million every year in additional claims.

Florida has already borrowed $1.2 billion from Washington to pay out benefits under current eligibility rules.

"At the rate we're going, we would burn through the money in about six weeks, and we would only be increasing our annual costs," says Tamela Jones, general counsel for the Associated Industries of Florida, a statewide business lobbying group.

Other states have decided that taking the money upfront is worth the increased costs down the road. But having failed to save for the downturn, more than 30 states are still raising taxes on employers and, in a few places, cutting benefits. Those are actions nobody wants to see happen while the economy is so shaky.

So more than half the states decided to borrow from the federal government to pay a big share of claims right now. After all, a separate provision of the stimulus law makes loans for unemployment insurance interest-free for states through the end of this year.