The Pew Charitable Trusts

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For more than two years, stubbornly high unemployment has been taking a toll on the nation's workforce, but for states, the mounting costs of paying benefits to millions of people who can't find work are only beginning to become clear.

Come this fall, some 30 states will be on the hook for paying $1.3 billion to the federal government for loans they took out to keep sending unemployment checks to workers who've lost their jobs. And that's just the interest. In total, states owe the feds more than $42 billion , a tab they hope will evaporate on its own as the economy improves but will require decreasing benefits or raising taxes on businesses if it doesn't.

The situation represents a new stress on state budgets that already are reeling from four consecutive years of weak revenues, ballooning health care costs and now, the end of the federal economic stimulus program. President Obama responded this week with a budget proposal that would put off the states' interest payments for another two years. Meanwhile, several governors are looking at ways to restructure or pay down their unemployment debts while they wait to see what, if anything, Washington does on the matter.

Idaho Governor C. L. "Butch" Otter is one of them. Otter, a Republican, is proposing to issue bonds to repay the $200 million Idaho borrowed from the federal government after the state unemployment trust fund went broke. Texas has already done this with its debt to the federal government; Otter figures the idea will stave off $110 million worth of potential tax hikes on Idaho employers over the next three years. 

In Indiana, Republican Governor Mitch Daniels used his state of the state address last month to call "adjusting an out-of-balance unemployment insurance system" one of his top three priorities for 2011. Indiana has borrowed $2 billion from the federal government to pay unemployment benefits. The Indiana House has passed Daniels' plan to decrease benefits for the unemployed and increase premiums on employers. A tax panel in the state Senate has already approved the measure and now awaits action by the full chamber.

West Virginia's acting governor, Earl Ray Tomblin, also has made unemployment insurance a big priority this year, even though his state hasn't needed a loan to keep its unemployment fund solvent. Tomblin wants lawmakers to allow the state unemployment insurance fund to borrow up to $20 million from the state's rainy day account, just in case. "This will give employers an added assurance that they will not be subject to tax increases during this time," Tomblin says . And it will "let employees know that the state is serious about making sure that their benefits will be there while our economy recovers."

President's proposal a factor

One of the reasons unemployment insurance is getting attention in state capitals is because a previous federal effort to provide states relief is ending. The federal economic stimulus law had provided states interest-free loans, but that provision expired at the end of last year. In January, borrowing states began accruing interest on the loans. They are required to start paying back the interest by September 30.

Unemployment insurance is a joint federal-state program that provides laid-off workers with a portion of their paychecks. States administer the program, determining who is eligible, how much the benefit will be and the length of time help is available. The program is funded through federal and state employer payroll taxes.

California, Michigan and New York have borrowed the most from the federal government, and therefore face the heftiest interest payments of more than $100 million each. Hawaii has the smallest interest payment due in September, under $1 million, according to estimates from Federal Funds Information for States , an organization that tracks the fiscal impact of federal budget and policy decisions on state budgets and programs.

Obama would give states a reprieve, while also raising the unemployment taxes that employers pay by doubling the amount of a worker's income that is subject to the tax from $7,000 per year to $15,000. Key Republicans have objected to that idea.

"We need to reform our unemployment programs, says Representative Dave Camp , chairman of the powerful Ways and Means Committee. "But any plan that relies on more than doubling the tax base and then continuing to raise payroll taxes in perpetuity isn't going anywhere in the House."

The fate of the president's proposal on Capitol Hill could influence what happens in Idaho. State legislation is pending to authorize the issuance of bonds. The legislation does not require bonds to be issued. It only would give the state Department of Labor authority to issue bonds if it believes that is in the best interest of the trust fund. Should the legislation be approved, it will be up to the department to determine whether to issue bonds.

If Idaho goes ahead with the plan, its solid credit rating would allow the state to sell the bonds at less than 3 percent interest, compared to the 4.1 percent rate the federal government charges, saving the state millions of dollars in interest.

This wouldn't be the first time states issued bonds to cover unemployment insurance loans. After the 2001 recession, Illinois and Texas authorized more than a $1 billion in bond sales to address their unemployment trust problems, according to the Associated Press. Arkansas, Florida and Nevada also are looking at the idea now.