Canary in the Budget Coal Mine

States have reported worsening budgetary situations for months now and governors, faced with annual balanced budget requirements, have ordered repeated rounds of fiscal belt tightening. On Monday, a New York Times story revealed another symptom of states’ financial problems: the depletion of funds to pay unemployment compensation.

Thirty states are within a few months of exhausting their funds (see Times graphic). Indiana’s fund went belly up last month and the state has already borrowed twice from the federal government to cover benefits. Michigan, the poster child for economic collapse, has used federal funds to pay unemployment compensation for years and is on the hook to repay more than half a billion dollars. More states are lining up at the federal borrowing window.

Funding problems stem in part from poor planning. Many states cut unemployment taxes when the funds were flush, reducing surpluses. Now some states are boosting taxes on employers at a time when many firms are already hard-pressed to meet their obligations. By raising firms’ labor costs, higher taxes could cause even more job losses.

Funds financing unemployment compensation are separate from states’ general budgets and states do not move money between the two uses. But as states struggle to balance their budgets, unemployment-compensation funds may serve as the canary in the budget coal mine where state finances threaten to implode.