The number of states that have exhausted their unemployment insurance fund and now must borrow from the federal government to meet weekly payment obligations continues to rise. So far, 18 states have tapped the feds for a total of $12 billion.

An exhaustively detailed report released last October by the Dept. of Labor, titled “Significant Measures of State UI Tax Systems,” presents a snapshot of the precarious condition of each state’s unemployment insurance fund. Within the report  are three measurements that reveal how each state has handled (or bungled) its unemployment insurance fund.

The first is called the Adequate Financing Rate, where the DOL has calculated the tax rate needed to meet the average benefit cost. As of last October, only seven states had tax rates sufficient to meet current obligations.
The second measurement is the Average High Cost Multiple, which gauges how close to insolvency each state’s fund is. States below a certain threshold are assessed a solvency amount that is added to the minimum tax rate in an attempt to shore up the fund. Last October, there were 34 states that didn’t meet the minimum.

The third is the Experience Rating. This is where state governments let employers reduce their current contribution tax rate because prior years had reduced benefit demands – you know, steering the boat by watching the wake. This is a great example of how a bubble economy leads to the misallocation or, in this case, the under-allocation of capital. The longer the good times rolled, the firmer the belief that they would never end, and so states just kept on letting employers cut their tax rates. Of the 53 states (including Puerto, Rico, D.C., Virgin Islands), 45 have allowed between 1% and 90% of employers to lower their tax rates below the rate needed to meet the average benefit cost (national average is 18%).

All 18 states on the borrowers list, shown in the chart here, scored poorly in each of these categories. If correlation does indeed lead to causation, there are 10 other states with equallypoor scores in all three categories and 12 more states that fall short in two of the three measurements in queue.

Ending on a positive note, Maine, Mississippi, Montana, New Mexico, Oklahoma, Washington, and Wyoming rated high in each category. Yet, with expectations of continued and increasing high unemployment, every state faces a daunting challenge ahead to meet its obligations. We’ll update the situation this fall when the next report is released. Stay tuned.