The pandemic was full of firsts, including the first time states received hundreds of billions of federal dollars they could use to shore up their depleted state unemployment insurance (UI) programs. The March 2020 CARES Act provided $150 billion in a flexible “Coronavirus Relief Fund,” whose potential uses included covering states’ “unemployment insurance costs.” Then the March 2021 American Rescue Plan Act (ARPA) provided state and local governments $350 billion in “fiscal recovery” funds that also could be used to shore up UI trust funds, as well as pay back federal unemployment loans.
Those stipulations made sense. During the pandemic, every state experienced a massive increase in demand for UI checks, which depleted their benefit trust funds. State UI payments grew fivefold to a record $143.4 billion in 2020 when $600-per-week federal bonuses were paid. UI benefits then moderated to $44.3 billion in 2021 when federal bonuses dropped to $300 per week and to $24.3 billion in 2022 after the bonuses ended.
The 2020 spike resulted in some states exhausting their UI trust funds, forcing them to claim federal loans to continue paying benefits. In October 2020—roughly six months into the pandemic—19 states had already drawn $34 billion in federal loans. In October 2021, 12 states had loans worth almost $46 billion. Now just over two years later, only three states still have outstanding loans worth $26 billion.
Data from the National Conference of State Legislatures helps explains what happened. 23 states used $7.6 billion in federal CARES Act funds to boost their UI trust funds; then 26 states (many for a second time) used $19.2 billion in ARPA funds to do the same, including by paying back federal loans.
The three remaining states with outstanding loans are revealing.
The US Virgin Islands (which, like DC and Puerto Rico, is considered a state under the UI system) owes almost $88 million and has had outstanding loans since 2009. Federal law requires states with longstanding loans to repay them by graduated increases in federal unemployment tax rates. The Virgin Islands has had loans for so long that its effective tax rate of 4.5 percent is over seven times the 0.6 percent rate that applies to non-loan states.
New York has a newer but far larger current balance of $6.9 billion, despite its state and local governments’ receiving over $7.6 billion in flexible funds under the CARES Act and another $23.8 billion under ARPA. In each case, more than half of those funds went to the state, which chose to spend none of the money to improve UI solvency or repay federal loans. Meanwhile, after ARPA New York created a new $2.1 billion program paying first-time unemployment checks to illegal aliens. Because of its outstanding loan, the federal payroll tax rate in New York has now doubled.
And then there is California, which was the first state to newly tap UI loans during the pandemic. California’s current loan balance is $19.1 billion, down somewhat from a pandemic high of $23.8 billion, which was likely an all-time record. (Historical loan data are spotty, but a recent DOL report notes that, during the dozen years before the pandemic that include the Great Recession, the largest loan balance was $11.0 billion, also for California.)
California’s state and local governments received $16.1 billion in CARES Act funds, plus $43.5 billion in ARPA funds. Those massive federal funds were layered on top of the state’s own historic budget surpluses, which included $47 billion in 2021‑22 and $55 billion in 2022‑23. As one January 2021 article put it, California was “swimming in money.”
Like New York, most of California’s federal funds went to the state, which devoted only a relatively tiny $5.9 million in CARES Act funds “towards unemployment benefits,” and no ARPA funds. Yet following ARPA the state adopted Governor Newsom’s $12 billion “Golden State stimulus plan” providing Californians $600 checks just as they headed to the polls for his recall election. Meanwhile, as in New York, California’s continued failure to repay its loans means the federal unemployment payroll tax rate there has now doubled.
The lessons should be clear. Many states used generous federal assistance to restore solvency to their UI trust funds and responsibly repay their federal loans. But two big-spending blue states instead chose to plow those federal funds into dubious new spending schemes, leaving employees—who ultimately bear the burden of higher payroll taxes through lower wages—holding the bag.
If the federal government ever provides flexible funds to states again in a recession, it should require them to first repay any outstanding federal unemployment loans. There’s no reason for Uncle Sam to get suckered this way again.