Friday, December 19, 2008

New York Times: States' Funds for Jobless Dry Up

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If you've been reading for longer than week, you know our dire warnings on state budgets we've been espousing since day 1 of our web life. Here is yet another issue the market is not "pricing in" or apparently cares less because our Federal Reserve will print money to make all our problems "go away into the night".

As I read this the one surprise was the disaster that was tiny Rhode Island - being intellectually curious of why they are having so much trouble I posted a quick blurb at the bottom of this post. Folks, whatever Wall Street does with its song and dance (ignore this, ignore that, trust in government to save us all) the pain on Main Street is going to be the story of 2009. Along with B52 Bomber Ben Bernanke throwing money from the heavens.
  • With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, (that's not good, I wonder where they will get the money?) and some are turning to the federal government for loans (oh yes, how could I not guess that? are we calling them loans? Will it be 2009 or 2010 when we change the term "loan" to "stimulus"?) or increasing taxes on businesses to make the payments (ah yes, that's one way to make struggling businesses shut their doors).
Before I go any further, this example above is the catch 22 for our entire nation. Eventually there is fallout from our entitlement (Medicare) issues and Bailout Nation mentality. Someone eventually has to pay (your kids and grandkids). And this country is going to be one of the highest tax centers in the world. A country full of Cook Counties [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%] and Hobokens [Dec 4: Bloomberg - Hoboken New Jersey Increases Taxes 47%] You folks in California and New York are already hearing all the new taxes being proposed - this era is just a precursor for the "bill" we eventually have to pay. The irony is we scoff at those damn "socialists" in northern Europe for their high taxes (in return for paying for healthcare, universities, social safety nets) and we're just heading right down the same path on the tax front - but without any of the benefits those socialists enjoy. That's going to the great joke at the end of this blowup. We'll have the costs without the benefits. Only in Cramerica.

Anyhow, I digress (as I often do) - back to the current crisis; who cares about the long term crisis. We'll deal with that (with far higher taxes and much lower services) when we get there!
  • Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months, according to the National Association of State Workforce Agencies.
  • Funds in two states, Indiana and Michigan, have already dried up, and both states are borrowing from the federal government to make payments to the unemployed.
  • Unemployment taxes are collected by states from employers, but the rate varies from state to state per employee. In good times states build up trust funds so that when unemployment is high there is enough money to cover the requests for benefits, which are guaranteed by the federal government.
  • “You don’t expect the loans to happen this early in a jobs slump,” said Andrew Stettner, the deputy director of the National Employment Law Project, an advocacy organization for low-wage workers. “You would expect that the states should, even when they are not well prepared, to have savings.” (not when your political system is based on electing people on dogma and 10 second sound bits.... and who you'd like to have a beer with - we are too busy with two parties enjoying the milking of the system to think long term. Planning? hah Rainy days? never)
  • It is recommended that states keep at least one year of peak-level benefits in their trusts, but many have not, and already some states are far worse off than others.
  • Indiana’s unemployment trust fund went insolvent last month, and has borrowed twice from Washington since then — the first such loans to the state since 1983. It also expects to request an additional $330 million early next year. (pshaw, $330M? peanuts - thats 1 day of an AIG bailout - to the presses Ben! 30 more states a comin'!)
  • Michigan, which has been borrowing money from the federal government for the past few years to replenish its fund, is now $508.8 million in the hole and unable to repay it. Next month the state, where the unemployment rate is more than 9 percent, will begin levying a special “solvency tax” against some employers to replenish its trust fund. ($500M more Ben!)
  • California, New York, Ohio, Rhode Island and other states are inching toward insolvency as well, and may have to borrow from the federal government to get through at least the first quarter of 2009. In South Carolina, officials recently requested a $15 million line of credit. (sheesh, I thought South Carolina was actually being run fiscally conservatively) “Right now we have $40 million in our trust fund, and we are paying out around $11 million a week,” said Allen Larson, deputy executive director for the unemployment insurance program at the South Carolina Employment Security Commission. “So we think it is going to be very close as to whether or not we can get through this year. We have never experienced anything like this.”
  • Officials in New York said the state’s trust fund has about $314 million, compared with $595 million last year, and will most likely have to borrow from the federal government in January.
  • As more people lose their jobs, the revenue base that the benefits are drawn from shrinks, making it harder to pay claims. (vicious circle - hmm, think we talked about this one in 2007 - surprised intrepid bloggers could figure it out unlike well paid politicians of the highest order) Adding to that burden is that states will eventually have to pay back what they borrow. (nah, the future loans will have a new name by late 2009 - we'll be calling them "stimulus" - no need to pay back a stimulus now is there?) States that come up short have the option of borrowing from the federal government, but if the loan is not paid back within the federal fiscal year, 4.7 percent interest is accrued, which cuts into states’ general funds. (cough - stimulus)
  • In many cases, states that have kept unemployment tax rates artificially low — or in some instances decreased them — find themselves in the worst pickle now. Indiana legislators, for example, reduced the tax rates to businesses by 25 percent in 2001.
  • To recalibrate the balance, several states are raising taxes on businesses — (which will kill off more struggling businesses) often through an automatic increase that is triggered when fund levels are endangered — to keep the unemployment checks flowing. An example is the Michigan solvency tax, which will be levied against employers whose workers have received more in benefits than the companies have contributed in unemployment insurance taxes, to the tune of $67.50 per employee. In Rhode Island, where the unemployment rate is 9.3 percent, the taxable wage base will go to $18,000 from $14,000 in 2009, the highest rate in a decade.
So I was curious what exactly was impacting Rhode Island - and I found this story. Aha, these suckers actually "make stuff" (manufacturing) - first mistake! Hello, have you not been watching Indiana, Michigan and Ohio - those "old school" states try to make stuff too - you see how that is working out right? Service based economy is where the gold is fellas! You know - stuff like financial engineering! Or kitchen remodeling! Polish my shoe, I'll cut your hair, you walk my dog, he'll install some cabinets, she'll take my takeout order! That's an economy baby! Uncle Ben will print more dollars, we'll pass those dollars along from one American to another as more dollars are printed, and by "magic" we all have "more dollars" and we all get "richer"! (Ponzi scheme? dare I say it?) See how it works? Not this "making stuff" that people across the world want that draws in actual capital from outside the country. Our labor is too expensive for that foolishness - we have Chinese for that! Ok ok I relent, one day when Americans will lower their living standards to making $3/hour - MAYBE - just MAYBE our generous CEOs (making 300x the average salary) might bring back some of those lowly "making stuff" jobs back. But Rhode Island - that's going to take a generation at least.

The second mistake is Rhode Island is full of small businesses! Foolish! The government doesn't care about small businesses (which employ the great majority of Americans) - if you are not too big to fail... or are too small to lobby - you don't matter. I don't care that you struggle with healthcare costs - send me a contribution check and have all your buddies in the 10 employees and less business demographic (and I mean all of them) and MAYBE I'll grant you an audience up here in D.C. Or I can just talk to my buddy at Exxon or General Electric, and in 1 check out-do everything you and your buddies can do for me. Your issues? Get back to me at the black tie dinner ($2500 a seat).

So Rhode Island, I'm sorry - now I see what your problems are. I believe a change to a service oriented big business economy will get you far in the halls of Congress and TRANSFORM your lowly state to what it needs to be: the flood of pork shall flow your way, regulations shall be changed in your favor, and all will be well. Don't hate the playa Rhode Island, hate the game.
  • Rhode Island now has the highest unemployment rate in the nation, the first time the state has held that distinction in the three decades since such records have been kept.
  • There are several reasons Rhode Island has fared so poorly in the economic crisis gripping the country. For one thing, said Sandra M. Powell, director of the state’s Department of Labor and Training, the economy here “has been traditionally strong in the manufacturing sector,” which has “shed jobs quite a bit over the last several years.” Rhode Island also has few big companies — more than 80 percent of businesses employ fewer than 20 employees — and small employers have less reserves to withstand economic turmoil, Ms. Powell said. Mr. Kaplan said that as the industrial jobs moved out of the state, it had become too dependent on lower wage service jobs like retail and hospitality, (heresay - this is where the entire country is going - don't tell me we cannot build a middle class on the back of $9-$11/hour service jobs) which he said were “very vulnerable to economic downturns.”
The rest of the story is filled with human experience pieces - people who have lost multiple jobs, making low wages, struggling to get by - you know the type; the ones who don't work "hard enough" for healthcare and "don't have a future in our knowledge based economy". You know - those folks who will be buying homes with the 4.5% mortgages in 2009 - per the financial TV punditry.

Anyhow, I look forward to our path of emptying the country of all goods producing industries - then we can covert these backwards states of Michigan, Indiana, Ohio, Rhode Island back to productive farmland since this is going to be our top export the next 50 years. Err, along with whatever the NYC banks come up with in about 5 years to scam the rest of the world.

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