[Nevada] has a 14.3 percent unemployment rate, the highest in the country, and it has so far received $561.55 per person in stimulus funds. That’s a little more than half of the average stimulus per person received by the state with the lowest unemployment rate in the country: North Dakota has an unemployment rate of 3.6 percent, but it has received $1,059.95 per person in stimulus money. The District of Columbia has an unemployment rate of 9.8 percent, and has received $5,748.61 per person. That’s more than ten times the per person amount received by Nevada, which has higher unemployment.

As I have written before, the unemployment crisis is in part a regional one, though the response has largely been national. If I had my druthers, I would push for more specific stimulus for the places worst-hit by the recession: the real outliers, Michigan, California, Rhode Island, Florida and Nevada.

All states save for Vermont are barred from running deficits. That means, when tax revenues fall and spending on programs like unemployment insurance rises during recessions, states face large fiscal gaps. Most make these up with rainy-day funds or bond issuance. But the severity of the recession has pushed some states close to insolvency. They are making up the gap by doing everything from turning off street lamps to reducing the frequency of trash pick-ups to raising parking meter rates to firing hundreds of thousands of workers.

Today, the Senate is expected to vote on a package to relieve states: billions of dollars in Medicaid funding and a pool of cash to help local governments keep teachers on the payroll. But the bill is a fraction of what Congress initially hoped to pass, containing half of the Medicaid funding states expected and less than a third of the education-jobs funding originally proposed.

Bernanke did an excellent job of laying out the states’ fiscal problems. But when it came to solutions, he came up mostly empty. “Assistance from the federal government, especially through the fiscal stimulus package, has eased, but certainly not eliminated, the budget difficulties faced by states,” Bernanke said. “Although states and localities will continue to receive significant aid this year, that source of help will be winding down next year.”

Here, he discusses possible solutions — bolstered rainy-day funds and changes to the “capital budget,” the Congressional budget for infrastructure investments.

…I do not advocate changing the balanced-budget rules followed by 49 of the 50 states; they provide important discipline and are a key reason that states have not built up long-term debt burdens comparable to those of many national governments. However, as is the case today, these rules may force significant state cutbacks in bad economic times when services are most needed. Moreover, many government programs — in areas such as education or health care, for example — are likely to be most effective when funding sources are stable and predictable, allowing for longer-term planning.

Tools exist to help mitigate the effects of the business cycle on state budgets. Many states deal with revenue fluctuations by building up reserve — or “rainy day” — funds during good economic times. Measured as a percent of general fund expenditures, the aggregate reserve fund balances for all state governments stood at a record of about 12 percent at the end of 2006; the states represented by the SLC had accumulated above-average reserves of around 16 percent. These high reserve-fund balances were helpful in lessening the severity of spending cuts or tax increases in many states. Nevertheless, given the depth of the recent recession, even these historically high reserve-fund balances proved insufficient to buffer fully the budgets of most states. Thus, state governments may wish to revisit their criteria for accumulating fiscal reserves. Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times.

In principle, some smoothing of state government expenditures over time could take place through the capital budget. Maintaining or even increasing the pace of infrastructure construction when the economy is weak fosters economic development and provides local jobs, and it may even allow the state to get more bang for the buck because of increased competition among private contractors when demand is slack. However, voters and policymakers may understandably be reluctant to approve new bond issues and take on additional costs for debt payments in a period of fiscal and economic stress.

But states can only save so much, and the stimulus increased capital spending dramatically; it does not seem to me these suffice as a long-term fix. There are other ideas, such as the partial federalization of Medicaid, that seem to make more sense.

Sen. Max Baucus (D-Mont.) is trying to hand over $24 billion in much needed Medicaid funding for states, known as FMAP. A Senate Finance Committee aide writes, “Chairman Baucus continues to work to build the support of 60 Members needed to pass the FMAP funding and is in close contact with [Sen. Harry] Reid on a potential vehicle to extend that policy.”

And House members including Rep. Jim McDermott (D-Wash.) are working to try to re-up funding for the Temporary Assistance for Needy Families (TANF) Emergency Fund. (Senate Republicans blocked a reauthorization of TANF funding in March.) Rep. Nancy Pelosi (D-Calif.), the Speaker of the House, has continued to pressure the Senate to pass House bills authorizing and offsetting the spending.

Speaking earlier this week, Pelosi said that these initiatives have been “paid for, but they have not passed yet: enhanced FMAP funding — paid for; a comprehensive jobs bill — paid for; assistance for teachers – paid for.” She argued:

America’s state legislators and governors have been clear that one of the best ways Congress can help the budgetary crises our states are facing is enhanced FMAP funding.  That’s because it is fungible and flexible. Enhanced FMAP has been both an opportunity and a challenge for you. When Congress included $87 billion in enhanced FMAP investments in the Recovery Act, it helped keep cops on the beat and teachers in the classroom and helped address the health needs of your constituents.  Many of your state budgets have been predicated on continued enhanced FMAP funding.

As you all know, the House passed an extension of FMAP last December in our comprehensive jobs bill. And now, FMAP is stalled in the Senate, even though it has a majority of support in that body.  In order to pass, it must have bipartisan support. You are the most eloquent and persuasive voices on this subject; you know best why this is necessary.  I urge you to tell Republicans in the Senate about the real cost to your communities of their opposition — cuts to hospitals, nursing homes, and public safety, elimination of domestic violence and homelessness initiatives, and slashed budgets for mental health and child welfare services.

She also pushed for edujobs funding, passed by the House and dropped from the Senate supplemental war-funding bill.

The wrangling comes as local government say they might slash as many as 500,000 workers in the next year if Congress does not provide Medicaid, TANF and education-jobs funding for states. A report released yesterday by the National League of Cities, the National Association of Counties and United States Conference of Mayors says that local governments might slash up to 9 percent of their workforces due to congress reneging on promised funds.

“Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,” the report says. “In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services.”

People seeking unemployment benefits wait in the lobby of an Employment Development Department office in California. (EPA/ZUMAPRESS.com)

On Tuesday, the Senate plans to vote on a federal extension of unemployment benefits, blocked by Senate Republicans for an unprecedented two months. The swearing-in of Carte Goodwin, the temporary replacement for the late Sen. Robert Byrd (D-W.Va.), will give Democrats the crucial 60th vote to overcome a GOP filibuster and restore unemployment insurance to 2.5 million Americans.

[Economy1] But that poses a real challenge to the state unemployment insurance agencies. They are already overextended, dealing with the massive expansion of the unemployment insurance system to grant up to 99 weeks of benefits to those eligible among the 38 million people who have been unemployed at some point over the course of the recession. Now, with the Senate on the verge of action, states are scrambling to figure out how to retroactively disburse seven weeks of benefits worth more than $10 billion to the 2.5 million people needing them, as quickly as possible.

Part of the problem is that the high unemployment rate has already overloaded state systems. Last month, the National Association of State Workforce Agencies completed a survey of the unemployment insurance providers in all 50 states and the District of Columbia. In the report, 46 of the 51 providers said they had difficulty managing the work flow. And states cited congressional inaction as one source of the headaches. Oregon, responding to the NASWA inquiry, named Congress as its biggest problem: “[Lawmakers’] inability to complete legislation to extend [emergency unemployment compensation] in a timely [manner] has created a substantial amount of work in our UI Call Centers answering inquiries from concerned and panicked UI beneficiaries.”

Those “panicked UI beneficiaries” number in the millions and need answers as to what they are getting, how and when. Expecting the extension to come through, most state agencies have continued to update their files through the lapse. Though unemployed workers have not received checks, they have continued to file with their state agency to affirm that remain out of work and are searching for new jobs, a requirement to receive benefits. The decision to keep that information current through the Senate’s dithering means that the states will not need to work through a 2.5 million-person backlog of paperwork once the benefits are extended.

But unemployment benefits are allocated using a complicated multi-tier system, with dozens of rules about qualification. Nobody — neither the state agencies nor the unemployed — knows just what Congress will approve and how that will comport with state systems. Will the Senate vote on the House bill? Will the House have to take up the Senate version? Will Congress approve the $25-per-week Federal Additional Compensation funds, tacked onto unemployment checks? How will states deal with disbursing the money? Will they go claimant by claimant, or week of dropped claims by week? Confusion over what is happening means that state unemployment agencies are already receiving thousands of questions, overloading call centers.

One issue is that if a worker has had an intervening period of work during the eight-week lapse, he or she needs to inform the state and might qualify for a new tier of benefits. “Say you were a construction worker who got a week-long gig on a project during the lapse,” explains George Wentworth, an analyst at the National Employment Law Project. “Maybe before you qualified for $600 a week in federal extended benefits. You might requalify for a $150 state benefit rate because of those intervening earnings, even if you had weeks of federal benefits left. Congress is, in this legislation, probably saying you can stay on your federal benefits. But all of those people need to be reprocessed, and there is no sense of scale as to how many people that might be.”

Communication — simply getting news about about changes and processes — might be the biggest challenge. “You will hear lots of claims from workers, claims that will be accurate, that it will be difficult to get through to staff in the unemployment insurance agencies,” Wentworth says. “The infrastructure has really been operating beyond maximum capacity for some time. This is the most weeks [of benefits] for the most people that states have ever had to manage. Frankly, the systems were designed in terms of capacity based on historical previous high levels of unemployment. And this is the highest level of unemployment since the early 1980s.”

Other problems are state-specific. Some states, such as Georgia, have had no official policy of retroactive payment, but are planning to make make an exception this time — posing a logistical challenge as they update their systems. And in Florida, more than 200,000 unemployed persons might not get their benefits at all. The state included a June 5 expiration on the extended benefits in a state statute. That means that when Washington re-ups the program, hundreds of thousands of Floridians won’t be able to resume receiving their benefits if current law stands, the Florida Independent reports.

“Almost 35,000 workers are losing their only real source of income each week while Congress continues to stall the re-authorization of the extended benefits program,” Florida AFL-CIO President Mike Williams said in a statement. “The fact that these workers and our economy will continue to suffer when Congress does act because of a single line in Florida Statutes is appalling. This program costs the state next to nothing and does not raise unemployment insurance rates for businesses.”

Other states have prepared for the congressional reauthorization but still face an enormous logistical challenge. Norm Isotalo, a spokesperson for the Department of Labor in Michigan, the state with the second-highest unemployment rate at 14 percent, said the state had been working overtime to ensure the more than 120,000 persons in need of retroactive benefits get them quickly. “We’ve been holding meetings in anticipation that the Senate will pass some legislation next week that will restore these federal benefits,” he said. “We will probably make a lump sum payment to people who are owed retroactively. Then, we are going to reach out to people who have exhausted state benefits and never had a chance to apply to [federal extension programs].” He noted the department was preparing for the deluge by keeping additional workers on overtime, but that planning remained ongoing.

Labor experts say that unemployment insurance recipients should expect some hiccups as their states send all of those checks out. “It’s unfair to the states,” Wentworth says. “It is very difficult to manage these situations when you have a long gap in reauthorization, even in terms of just explaining it to unemployment insurance recipients.”

I’ll be looking at this phenomenon closely this week, particularly in light of the collapse of the jobs bill and the stall-out of the bill to keep state workers employed. But for a 30,000-foot view, here is a chart I made with data from the Center on Budget and Policy Priorities. For all of the states running deficits, it shows each state’s projected fiscal year 2011 shortfall in dollars, and then shows what percentage of each state’s 2010 budget that is. The numbers are pretty harrowing:

The map demonstrates the regionalization of the remaining recession: Where it takes longer to get a job, there tends to be a higher rate of unemployment, steeper declines in home values, higher rates of foreclosure and more severe state budget deficits. Compare the above graph with those below.

This shows the rate of foreclosure (from RealtyTrac).

And this shows the rate of unemployment (from the Bureau of Labor Statistics).

And this shows each state’s deficit as a percentage of its budget (from the Center for Budget and Policy Priorities).

The charts show that states like Michigan, California, Nevada and Florida are fighting harder battles on more fronts — and will take much longer than the rest of the country to normalize economically.

Kansas lawmakers are hoping the federal government will help. After the state’s April revenue missed estimates set just two weeks earlier, the legislature responded by changing the state budget to assume Congress will extend more federal support for Medicaid through the end of the year.

Increased federal spending on Medicaid…was a major component of last year’s stimulus package, and it has helped many states prop up their budgets. But it is uncertain that Congress will approve more such funding.

In some states, governors are responding to the April shortfalls on their own. Missouri’s April tax revenue decreased $13.2 million, or 3.6 percent, from the same month a year ago. State budget director Linda Luebbering ordered agencies to hold back $45 million in appropriated spending because tax collections were so far below projections.

Other states have already taken drastic measures to close budget shortfalls. For instance, in March, Arizona decided to end its state health insurance program for children, eliminating free coverage for 47,000 kids. California might end its welfare-to-work program as well as a number of child-care initiatives. And South Carolina has closed group homes for children and a program to help youths emerging from prison sentences to get jobs.

According to the provision, the Interior Department will determine which states might be affected by a spill from a proposed oil rig, and those states could veto drilling plans by passing a law. States could also put a stop to any drilling within 75 miles of their coasts.

This change might be enough to bring some Democratic senators — like Bill Nelson of Florida, who had threatened to filibuster a bill that included offshore drilling — on board without alienating Republicans and conservative Democrats who have insisted on more drilling. But it’s a delicate balancing act, and we’ll have to see how it plays out after tomorrow’s unveiling.

Rep. Jim McDermott (D-Wash.) (WDCpix)

Most state unemployment programs are flat broke, according to federal analysts, and the states themselves are largely to blame.

Thirty-four state unemployment insurance trust funds have run dry as a result of the recent recession, forcing those programs to take out nearly $40 billion in federal loans to weather the storm, the Government Accountability Office revealed this week.

[Economy1] The crisis is no accident, experts argue, but instead represents a failure on the part of many states to build up a funding cushion during the good years that could see them through the bad. Unemployment taxes levied on employers, many contend, have simply been too low to provide that insurance.

“Long-standing UI tax policies and practices in many states over three decades have eroded trust fund reserves,” Andrew Sherrill, the GAO’s workforce director, told House lawmakers on the Ways and Means Income Security subpanel Thursday.

Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group, echoed that message. “States,” he told the committee, “entered this recession far less prepared than they had entered any of [the] recent recessions over the past 35 years.”

The insolvency trend could have far-reaching ramifications, experts warn, threatening the capacity of struggling states to help jobless workers through the next recession. The trend also raises broader questions about how the UI system is funded. Sherrill told lawmakers that the funding formula is ripe for an overhaul.

“The long-term decline of UI funding, culminating in widespread borrowing by state trust funds and the dire financial condition of the program, raises critical questions about the ability of the program to function as it has in the past,” Sherrill warned. “Now is the time … to consider changes to federal program policies that could better assure the long-term financial structure of UI trust funds.”

The trouble, many experts say, is this: State UI programs — which provide 26 weeks of financial help to laid off workers looking for new jobs — are funded with a tax on employers. Yet states are given broad discretion to set their own rates, and in recent decades, they’ve drastically scaled them back. Indeed, between 1978 and 2008, Sherrill said, the minimum state UI tax rate on employers fell from an average of 1.14 percent to an average of 0.37 percent, relative to taxable wages. By contrast, the federal UI tax is an across the board 6.2 percent on the first $7,000 of wages.

“This is the single most important reason why so many state trust funds are insolvent today,” Stettler argued.

There’s another key factor contributing to the problem: The eroding wage base. That is, while states must establish a taxable base income of at least $7,000 (the federal standard) — and while many states go much higher than that — only 17 states index that base to wage inflation. It only makes sense that those states that are taxing a higher proportion of wages tend to have money remaining in their UI coffers. Indeed, NELP estimates that the insolvent states have an average wage base of $9,500, while the figure for solvent states is $20,500.

Some lawmakers are already eyeing the problem. Rep. Jim McDermott (D-Wash.), for example, blasted the ill-prepared states Thursday, arguing that they “ignored one of the basic rules of any insurance program, which is to save money in good times to pay out more during hard times.”

Not that the states are solely responsible for ensuring the solvency of the state UI programs. The GAO noted several reforms that Congress could enact on a national scale. The $7,000 federal wage base, for example, established in 1983, isn’t indexed to wage inflation. Doing so would force a number of states to hike their own taxable wage bases, which in turn would yield larger UI pools during periods of economic growth.

McDermott, who chairs the income security subcommittee, hinted Thursday that Congress would play a role in the reform process. “The question that will increasingly confront Congress is whether we can help states suffering from huge deficits in their UI funds, while also encouraging them to take the steps necessary to ensure a strong and solvent unemployment insurance system in the future,” McDermott said. “I think the answer is yes.”

Not everyone on Capitol Hill agrees. Rep. John Linder (Ga.), the senior Republican on the Ways and Means subpanel, blasted the notion that hiking UI taxes is the answer to the current insolvency crisis. That idea, he said, “is just the latest example of Democrats’ desire to never let a serious crisis go to waste.”

“They will use state insolvency caused by the recession and their failed trillion-dollar stimulus law to argue for even higher federal and state unemployment taxes, forever.”

Former President George W. Bush (Gamma/Eyedea/ZUMA Press)

A decade’s worth of cuts in federal aid combined with states moving to copy Bush administration tax cuts have led to states filling revenue shortfalls with regressive tax policies that disproportionately affect the poorest Americans. According to “Who Pays?” a report issued in November by the Institute on Taxation & Economic Policy, the poorest 20 percent of Americans pay nearly 11 percent of their income in state and local taxes, the majority of which is in the form of sales and excise taxes. Those in the top 1 percent, by contrast, pay just over 5 percent of their income in state and local taxes, and the majority of that is income tax.

[Economy1] “To the extent that states rely on sales tax, they’re going to be regressive,” said Howard Abrams, professor at Emory University School of Law, pointing out that the most regressive states in the ITEP report depend on sales and excise tax revenues to a great degree. Since poor individuals spend rather than save more — or all — of their income, sales tax as well as excise taxes on goods like gasoline and cigarettes impact them to a greater degree. Their wealthier counterparts, by contrast, tend to save and invest, which means every dollar they make isn’t going towards taxable purchases. A graduated income tax is designed to balance this burden by taxing wealthier occupants at a higher rate, but some states have such low thresholds for their top rates, or their rate spread is in such a narrow range, that any benefit to lower-income residents is lost.

The poorest Americans are also burdened by regressive property taxes, said Philip Harvey, professor at Rutgers School of Law. Two factors contribute to this: One, they may live in less-wealthy municipalities that have to tax at a higher rate to provide services. Secondly, many lower-income individuals rent rather than own property. “Economists generally know property taxes tend to be regressive because rent includes taxes indirectly,” Harvey said. Since lower-income people statistically spend a higher percentage of their income on housing, this translates to yet another higher tax burden.

In theory, federal income tax balances out this disparity to an extent because it relies on a graduated formula, but critics of the status quo say the country’s poorest citizens are still suffering from the effects of the Bush tax cuts. “Unambiguously, federal taxes have become less progressive over the last 10 years,” said Kim Rueben, public finance economist at the Urban Institute-Brookings Institution Tax Policy Center.

“One of the big changes during the Bush administration was a substantial reduction on capital gains and dividends,” said Emory’s Howard Abrams. “The only people that got the benefit were the extraordinarily wealthy.” Not only does this rob federal coffers of funds, but it also sets a precedent for states, several of which followed suit with tax cuts of their own.

States’ tendency to mimic federal actions does have a silver lining in that 23 states and Washington, D.C., offer earned-income tax credits modeled after the federal credit. Matthew Gardner, executive director of the ITEP, said credits like these, especially when they are refundable, go a long way towards leveling the playing field for low-income people. These credits aren’t enough, though. “The credits that were introduced under Bush for the poor families were dwarfed by declining tax rates at the top,” said the Tax Policy Institute’s Rueben.

Bush-era cutbacks on federal monies sent to states are equally harmful to poor residents. “There isn’t a lot of redistribution being done at the state and local level,” said Alan Viard, resident scholar at the American Enterprise Institute. “You expect that and want it to be done at the federal level.” Problems crop up when the federal government scales back this involvement. With less aid coming from Washington, states must rely solely on their own residents for funding, which nearly always leads to an increased reliance on regressive tax policies.

The ITEP’s Gardner says he is hopeful that the recession-prompted emergency aid to states will become the new status quo. If the federal government becomes involved to a greater degree in redistributing the tax dollars it takes in, states would have the breathing room to roll back some of their sales and excise tax increases.

Progressive groups are hopeful that the Obama administration will reverse some of these disparities by allowing provisions that cut taxes for the wealthiest Americans to expire next year and in 2011. While this wouldn’t directly change states’ tax structures, these changes to the federal tax code would create a healthier balance for poor as well as middle-class citizens.

According to a report published by the Tax Policy Center, Obama administration proposals would lower the federal tax rates for all but the wealthiest 20 percent of citizens. The net tax rates for all Americans would be the same under Obama’s plan as under an alternate model that assumes the extension of the provisions implemented by Bush; however, the costs in the former case would be shouldered to a much greater degree by the wealthiest citizens. With a federal program like that in place, the inherently regressive nature of most state and local taxes would be less of a burden on those who have already borne an outsized share of this recession’s pain.