States' Unemployment Trusts Going Downhill

The good news for Mr. Hollinghead is that the federal government extended unemployment benefits for seven more weeks in an emergency bill rushed through Congress at the end of last month. That follows an earlier extension of 13 weeks passed in June that now brings the total run of the benefit to 10 months and protects more than one million Americans whose checks would have otherwise stopped coming this holiday season.

The widening budget shortfalls have some states weighing tax increases, despite the recession. Michigan, one of the hardest hit states with unemployment above nine percent, is already pushing up payroll taxes.

State budget problems are likely to worsen before they improve. Of the states that completed a survey from the National Conference of State Legislatures (NCSL) last month, 38 said they were expecting to be in the red for the year ending in September 2009 -- a total budget gap of $32 billion. Worse, 26 states forecast more red ink -- a cumulative $65 billion -- for the following year.

"As bad as the current state fiscal situation is, it may pale in comparison to what looms ahead," the NCSL said. "As a rule, state finances lag the national economy... this means that the toughest years lie ahead."

One Likely Option: Cutting State Services

With the easiest options already tapped, states may have to cut services.

"Food stamps I'm not worried about -- it's entirely federally funded," says Rebecca Blank, a senior fellow and economist at the Brookings Institution in Washington. "But I do worry about the healthcare programs and education. Medicaid is such a large part of the budget that it's easier to cut services."

Cutbacks in education could undermine an eventual recovery because that will mean fewer highly qualified workers, she adds, pointing to California's proposed $100 million cut for its state university system.

The state unemployment trusts are funded through the collection of payroll taxes and administered by the federal government under guidelines that require the money only be used to pay unemployment benefits, which average about $300 a week nationally. But the states still have considerable discretion over how much they pay into the system.