Tracking the Recession: Who Really Decides Whether to Take Unemployment Money

While some Republican governors are making headlines by threatening to turn down federal economic stimulus money aimed at enticing states to expand unemployment benefits to more low-income workers, the decision is not up to them. It’s a decision for state legislatures, and some are expected to say, “No thanks.”

In fact, the Congressional Budget Office projected that only 38 percent of the money would be spent because many state lawmakers would be reluctant to change unemployment benefit eligibility rules for fear of headaches down the road after the stimulus money runs out.

At stake is a $7 billion program – known as the Unemployment Insurance Modernization Act – that gives states money to fund jobless benefits for workers whose jobs are sporadic, part-time or interrupted for family-related reasons. While 21 states qualify for funds because they already have expanded their benefits to this segment of workers, the rest do not. States have until Oct. 1, 2011 to enact the laws necessary to receive the funds.

Supporters say the changes would extend benefits to an estimated 500,000 workers who are now left out of the system.

Six Republican governors – Mark Sanford of South Carolina, Sarah Palin of Alaska, Bob Riley of Alabama, Haley Barbour of Mississippi, Tim Pawlenty of Minnesota and Bobby Jindal of Louisiana – oppose expanding eligibility rules because they say this would hurt businesses, which pay for unemployment benefits through payroll taxes. They say that the new laws would result in higher business taxes when the stimulus money is spent.

In some states, the proposed laws could result in tax hikes in the future. But in the short term, taking the stimulus money would prevent tax hikes. Why? Because the one-time infusion of federal cash would replenish dwindling unemployment benefit trust funds which otherwise must be filled by collecting more money from employers.

The recession has already forced 30 states to increase their business taxes, and some of these are also among 14 states that are borrowing federal money to shore up their trust funds.

For each state – and no two are alike when it comes to their unemployment insurance laws – the decision whether to participate in the Unemployment Insurance Modernization Act involves complicated accounting and economic projections. State budget experts are carefully watching their shrinking unemployment trust funds to determine whether an immediate infusion of stimulus cash might be worth the risk that the one-shot federal program would put greater demand on the funds in the future.

“State lawmakers are still examining how much the proposed laws will cost. They have three years to do it. It’s not a cut and dried issue,” said Mark Katz, legislative director for the National Association of State Workforce Agencies.

In North Carolina, laws enacted three years ago expanded coverage to part-time, temporary and sporadic workers and the state has experienced no increase in benefits.

But in Louisiana, Jindal threatened to refuse his state’s $90 million stimulus allocation because he said a state economist had calculated that covering temporary and sporadic workers would increase overall benefits by $12 million a year. The stimulus money would cover that increase for at least seven years, but after that, Jindal said businesses would be stuck with the bill. He has since said he might accept the money after all, because U.S. Department of Labor officials clarified that the laws could be repealed in the future.

Although California lawmakers may adopt the proposed laws, the state employment commission has said the changes would wreak havoc on their crumbling computer system, costing nearly as much to upgrade as the $900 million the state stands to gain.

Republican governors Arnold Schwarzenegger of California, Charlie Crist of Florida, Sonny Perdue of Georgia, M. Jodi Rell of Connecticut, Jim Gibbons of Nevada and C.L. “Butch” Otter of Idaho have urged their legislatures to enact the laws required to get a share of the $7 billion. Three Democrats – Mike Beebe of Arkansas, Brad Henry of Oklahoma and Ted Kulongoski of Oregon ­ – have also done so.

As the recession continues, more lawmakers may decide to make the required eligibility changes, but for now, most are still weighing their options.