Unemployment Loans’ Catch-22

In the wake of the 2008 recession, 34 states had to borrow from the federal government to keep their unemployment systems solvent.  And 22 of them, including Connecticut, still owe a combined $30 billion that they will have to pay back.  Although the loans helped the states and their constituents weather the recession, a recent Stateline article examines how they may also be hampering their recovery. 

According to the article, employers, who fund unemployment systems through unemployment taxes, are now paying higher unemployment taxes in order to repay the loans, which could prevent some from hiring.  Also, some debtor states have responded by reducing unemployment benefits, although critics argue that this hampers recovery by reducing the money flowing through local economies.  A few states have issued bonds to pay off their debts, but although they may be able to get a lower interest rate than the 4% imposed by the federal government, they will still have to pay it back.  And to make matters worse, the burden of repaying the debt is keeping states from building up the reserves that could otherwise help them avoid borrowing again.