Here’s one estimate, by the Pioneer Institute: in three months.
For those of you still using calendars, that’s June.
For weeks, I’ve posed this question to state labor officials as the pandemic took hold and forced the economy into hibernation to save lives. One reason they’ve shied away from a prediction: Economic forecasts are pretty useless, because there’s no precedent for what is happening.
Still, there will come a day when the state’s unemployment insurance fund is depleted, and at the torrid pace of COVID-19 layoffs — nearly 330,000 in the last two weeks of March alone, with more coming every day — it’s perhaps sooner than anyone wants to acknowledge. Three months, by the way, is probably a conservative estimate, but more on that later.
The good news: The Commonwealth can always borrow money from the federal government to replenish the fund to keep benefits flowing. The state did this during the Great Recession, and this time it can borrow interest-free from the Uncle Sam, thanks to Congress’s $2 trillion economic rescue package, which allotted money to boost state unemployment funds.
The bad news: Taking on massive debt will be a financial hit to the Commonwealth’s bottom line during what is expected to be a sharp downturn caused by a virus-induced shutdown and a slow recovery that will decimate tax revenues.
If the economy doesn’t bounce back quickly, the state could be on the hook to borrow several billion dollars to keep unemployment benefits flowing, said Greg Sullivan, Pioneer’s research director and a former state inspector general.
“There is an extreme budget crisis right in front of us,” said Sullivan, who did the analysis on the unemployment insurance fund.
Massachusetts’ fund already is below federally recommended solvency levels, according to a February report by the US Department of Labor. That means when bad times hit, the state will have a hard time keeping up with claims. The fund is low, in part, because the state is generous with its benefits, which often rank among the highest payouts in the country.
Massachusetts won’t the be the only state that will need to play catch-up. But we might find ourselves in hot water a lot faster.
“I expect most states will burn through their trust fund this year, especially ones like Massachusetts that had not met federal savings guidelines,” said Andrew Stettner, a senior fellow at the Century Foundation who studies unemployment insurance.
So what’s a state to do?
There are only a few options, none good: Ask employers to pay higher unemployment taxes, but they’re already under financial stress; cut benefits while people are struggling financially; or tap the state’s nearly $3.5 billion rainy day fund, which no doubt will become a go-to pot for a bunch of budgetary shortfalls.
The job outlook is going to get worse before it gets better. The head of the Federal Reserve Bank of Boston, Eric Rosengren, has estimated the unemployment rate in Massachusetts will rise to 10 percent by the end of the second quarter. Others think the number will be higher. Bill Rodgers, a Rutgers University economist and a former chief economist for the Department of Labor, calculates the March unemployment rate in Massachusetts at 27.1 percent, up from 2.8 percent in February.
There’s really only one right solution in the age of coronavirus: Congress in its next economic relief package must provide big grants to state unemployment funds.
“It will require a different playbook and different orientation than [in] previous recessions and slowdowns, and a complete reexamination of how our safety net works,” said Senator Eric Lesser, who is a member of the state Senate’s COVID-19 task force and leads the economic recovery effort. “It will require a federal intervention.”
Here’s how Sullivan came up with his estimate the unemployment insurance fund could run out in three months, or sooner:
He looked at the recent monthly averages before the recent deluge: $107.8 million in benefits paid out per month to 58,770 recipients. Over the last two weeks of March, about 330,000 new jobless claims were filed.
If the average benefit is roughly the same as in the past 12 months, the amount flowing out would be over $675 million a month — more than six times the previous rate.
This is a conservative estimate assuming no new claims — and nobody is expecting that. But at the same time, the average amount is an educated guess. The new pool of people applying for claims is skewed by lower-wage restaurant, retail, and hospitality workers, sectors hardest hit by the shutdown. That means the unemployment insurance fund could last a little longer.
But here’s the other factor hurting the fund’s solvency: Employer contributions have been averaging $146.9 million per month. But with fewer people on payrolls — the workforce in the state of 3.7 million has shrunk nearly 10 percent in two weeks — employer contributions to the fund will decline, according to Sullivan.
So by June, the state will need to find a way to keep the benefits flowing.
Under another scenario, Sullivan estimates the fund could be depleted in two months if claims continue to increase at the same torrid pace. We’ll have a better idea on Thursday, when the next labor report comes out.
The pandemic is not only a public health crisis but also an economic disaster in the making. Unemployment insurance was not designed — nor intended to — cover layoffs that occur because of a forced shutdown.
Just as it did for workers and small businesses, the federal government needs to dig deep to help the states keep unemployment benefits flowing. We’re all in this together, and together is how we’re going to survive the pandemic.
Shirley Leung is a Business columnist. She can be reached at email@example.com.