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The Fiscal Disaster Set to Explode in December

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States have been borrowing from Washington to fund their unemployment trust funds. Next month, they have to start paying that money back.

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American states face a perpetual Sophie's Choice of sorts:

When times are good, and you own a business, the last thing you want to do is give up more of your profit.

When times are bad, the last thing you want to do is give up more of your diminished receipts.

But many US states are now in a vicious cycle that will be exploding in December. As businesses lay off workers, fewer payroll tax dollars go into each state's unemployment insurance trust fund. Simultaneously, as businesses lay off workers, more dollars are coming out of those states' trust funds to pay unemployment benefits.

Since March of 2009, 31 states have borrowed billions from the federal government to continue paying out unemployment benefits while keeping their UI trust funds from insolvency.

The federal stimulus provided for a moratorium on interest payments until December, 2010. And, as you likely know, that's a month from now.

Take a look at California.

The Golden State is on the hook for $11 billion in unemployment benefits this year but only taking in $4.6 billion. According to the Pew Center for the States, California would have to at least double its business tax to make up for the lost $6 billion.

Pew quotes Rick McHugh of the National Employment Law Project, who says it's "important to pay attention to the… states in good shape. Washington State hasn't had to borrow from the federal unemployment fund since the 1980s and -- if things continue looking the way they are -- it won't have to anytime soon. Over the past decade, the state's Legislature and business community agreed to a set of taxes that kept the unemployment trust fund well funded throughout the current recession."

Companies headquartered in Washington like Starbucks (SBUX), Amazon (AMZN), and Costco (COST) pay comparatively higher payroll taxes than do Texas-based companies like Dell (DELL) and Whole Foods Market (WFMI).

But, while nowhere close to Michigan's $382.57 per capita borrowing, now Texas' unemployment insurance borrowing stands at $1.4 billion, which works out to $57.19 per person, still quite a bit higher than Arizona's $6.50.

It's important to note that Texas also created half of all new net jobs in the country last year.

Even though state trust funds have now borrowed more, adjusted for inflation, than they did during 1981 and 1982, independent trader Jeff Macke doesn't believe state governments' UI trust funds will be driven to insolvency in December.

"It helps to think of this as you would a parent loaning his kids money," he tells Minyanville. "Dad may really want to get paid back. He may impose all sorts of penalties on his non-paying children. But it would be stupid for Dad to drive his deadbeat children into destitution for missing a payment. Ruining the kid results in dad never getting paid back and likely incurring further expense when Junior inevitably gets into real trouble."

I suppose we'll find out what happens in December.

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No positions in stocks mentioned.
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